Abstract
Stock repurchase, one of the most important ways to distribute earnings to shareholders, is often interpreted as a signal of underpricing of the firm's stocks. However, two anomalies can be observed in the stock repurchase behavior: (1) Prices of repurchased stocks often do not increase as expected after stock repurchase announcement. (2) The actual number of shares repurchased is frequently smaller relative to firms' announced intentions. In this paper, a theory of explaining these anomaly behaviors is developed and empirically tested. The theory posits that stock repurchase announcement is not a guarantee of stock underpricing, the price movement of repurchased stocks and the amount of stocks repurchased are the results of interaction between the management of the firm and the market investors. The empirical evidence supports the theory.
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