Abstract
Numerous studies document that firms buy back below average market prices. I model two hypotheses explaining the timing of actual share repurchases and test their predictions using a unique data set for the U.S. for the period 2004-2010. The market-timing hypothesis postulates that firms anticipate returns and thus buy back before stock price increases. The contrarian-trading hypothesis proposes that firms buy back more at lower stock prices simply because repurchases are negatively related to realized returns. While contrarian-trading firms have no timing ability ex-ante, their trading behavior generates empirical patterns suggesting ex-post that firms are able to buy back below average market prices. The empirical finding that firms buy back shares below average market prices can be entirely explained by contrarian-trading. Actual share repurchases are not followed by positive abnormal returns.
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