Share Repurchases, Undervaluation, and Corporate Social Responsibility

Abstract

Share repurchases have experienced growing popularity in recent years. The wealth transfer between shareholders associated with share repurchases has however been widely neglected in the literature, yet. Since managers are free to time repurchases so that ongoing shareholders profit at the expense of selling shareholders or vice versa, we investigate how the wealth transfer from share repurchases relates to a firm’s priorities regarding its stakeholder orienta-tion. Based on the idea that firms with higher corporate social responsibility (CSR) engage-ment take the interests of all stakeholders into more equal consideration, we posit that their managers are less inclined to take advantage of the wealth transfer from selling to ongoing shareholders, which occurs if the firm is undervalued. Consistent with this notion, our results show that firms with higher CSR engagement announce their repurchases in periods of ceteris paribus lower undervaluation. We find the same effect when using other proxies of a firm’s stakeholder orientation than CSR engagement. Overall, our results contribute to the under-standing of how stakeholder orientation and CSR engagement affect financial decision mak-ing and provide insights into the motives behind share repurchases.