Silent Combat: Do Managers Use Share Repurchases to Trade Against Short Sellers?

Abstract

We provide large sample evidence in response to anecdotal accounts that some managers increase corporate share repurchases in response to an increase in short selling. We discover a robust positive association exists between changes in quarterly share repurchases and contemporaneous changes in short interest. The positive association exists in univariate tests, multivariate models, and subsamples. Some companies are therefore increasing share repurchases when shorts believe the stock is overvalued. The next question is whether they do so to support overvalued equity, which would be a serious violation of the SEC requirement that price be set by “independent market forces without undue influence by the issuer” (SEC 2003). We examine future stock prices, accounting fundamentals, and trading by insiders for evidence of overvaluation. The overall evidence is more consistent with equity that is fairly valued, which would mean that managers trade against the shorts when shorts are mistaken. An unsolved puzzle is why the shorts sellers do not react by unwinding their higher positions.