It is widely known that under asymmetric information, share repurchasss can be used by firms to signal firm quality. In this paper, it is shown that the duration of share repurchase programs can signal the degree of firm quality. The model predicts that the highest quality firms repurchase a fraction of their shares outstanding over a short duration, medium quality firms repurchase the same fraction over a longer duration, and low quality firms do not repurchase shares at all. An empirical investigation of firms that engage in repurchase activity supports the model.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics