The role of financial media in share repurchases.

AutorPinto-Gutierrez, Cristian A.
CargoTexto en ingles - Ensayo

1 Introduction

The open-market share repurchase (1) payout method is the most common way managers distribute cash to shareholders. With this method, a firm will usually announce in advance its intentions to repurchase a fraction of the companies' outstanding shares in the open market over a number of months. This announcement does not commit the firm to actually follow through with the program and repurchase shares; in fact, in many cases, firms do not complete repurchase programs, and many firms do not repurchase at all (e.g., Oded, 2005; Yook, 2010). The literature generally uses the term managerial "cheap talk" to refer to share repurchase announcements that are not completed.

In this paper, I use recent advances in news analytics to examine the effect of investor attention on share repurchase outcomes and explain managerial "cheap talk." To measure investor attention, I calculate the amount of firm-specific news items in a recently developed news analytics product: The Thomson Reuters News Analytics (TRNA). TRNA is a machine readable service that contains all news that Reuters or the represented companies themselves (through newswire services) publish from January 2003 onwards. The advantage of this data set is that it contains news articles and press releases that have appeared on the screens of traders, and therefore, is a direct source of data to proxy for the attention of professional investors.

I begin my investigation by examining how the degree of firm-specific investor attention on the announcement relates to a firm's decision to actually repurchase shares following the announcements. I hypothesize that for firms with high levels of investor attention, the mere announcements of repurchases will be enough to correct the undervaluation, and firms will not need to actually repurchase shares. This argument is based on Vermaelen's (1984) model of signaling where managers of undervalued firms will convey the inside information using share repurchases as a signaling mechanism. I argue, however, that repurchase announcements will only work as a signaling mechanism as long as investors are attentive to companies' information. Indeed, after controlling for other factors, I find that the fraction of shares a firm actually repurchases after the announcement is negatively associated with the volume of news articles about the announcement. Consistent with my hypothesis, this result indicates that firms that attract high levels of investor attention to their announcements do not repurchase a large fraction of their shares.

This result is contrasting to those of Bhattacharya and Jacobsen (2015). The authors argue that firms with low numbers of financial analysts, low ratios of institutional ownership, and low levels of advertising expenditures are the most undervalued firms. Then the authors propose that these highly undervalued firms will attract sufficient attention from speculators who will trade away mispricing so that they will not need to actually materialize the buybacks. Prior studies, however, have used the same set of variables used by Bhattacharya and Jacobsen as proxy for mispricing, as proxies for levels of investor attention (e.g., King & Segal 2009; Lehavy & Sloan 2008; Madsen & Niessner, 2015). Thus, Bhattacharya and Jacobsen's (2015) results seem to suggest that ex-ante investor attention is positively related to the fraction of shares a firm actually repurchases after the announcement. This result contrasts with my findings when I use media coverage as proxy for investor attention.

I follow by performing a robustness check of my previous finding. Because a number of unobservable firm characteristics can simultaneously drive both the volume of news articles and repurchase outcomes, I use an instrumental variable (IV) approach with two instruments to mitigate endogeneity concerns. The first instrument uses variations in firms' advertising expenditures. Empirical evidence documents that firms' advertising expenditures are strongly and positively related to the media coverage firms receive (e.g., Reuter & Zitzewitz, 2006; Gurun & Butler, 2012). The second instrument uses a measure of the degree of distraction of media outlets, because some exogenous events may have shifted overall attention away from the firm that is announcing share repurchases. To identify distracting events, I use a measure developed by Eisensee and Stromberg (2007) that is based on the number of minutes that U.S. evening news broadcasts devote to the first three news segments in a day. Financial scholars have used this measure before. For instance, Peress and Schmidt (2014) use it to proxy for general investor attention to financial markets. Meanwhile, Liu, Sherman, and Zhang (2014) use a similar measure also as an instrumental variable for media coverage. Overall, my previous findings remain robust after I use the IV approach to control for endogeneity concerns.

Next, I reexamine the effects of media coverage on firms' actual repurchase activities, but now control for the effects of the quality of the information available on their stocks and the magnitude of their stock mispricing. Specifically, I re-estimate the role of investor attention with two additional interaction terms between media coverage and two proxies for mispricing, the numbers of sophisticated (institutional) investors who hold the stocks and the number of analysts who are following the firms. I argue that firms with high-quality information available on their stocks and in the hands of sophisticated investors will not have economic reasons to actually repurchase shares, especially if they attract sufficient investors' attention to the announcements. I expect that the negative relationship between investor attention on the announcements and share repurchase activities will be most pronounced among stocks that are priced most efficiently. I find that the negative relationship between media coverage and actual share repurchase actions after the announcements is more pronounced among stocks that are less likely to be mispriced (stocks from firms with high institutional investor ownership and high analysts coverage). Overall, this evidence suggests that managers of firms with high media coverage and low potential mispricing are less committed to complete their repurchase programs and their announcements are more likely to be "cheap talk."

Finally, I also examine the role of media in the firms' long-term post-announcements stock performances. If companies that have low investor attention on the announcements are the only firms that actually repurchase shares, then I expect their long-term positive stock performances to be the highest among these same announcers, especially if these firms are also the firms with the severest undervaluation. I find that firms with the lowest media coverage on the announcements correspond to the firms with the highest cumulative abnormal returns three, six, and 12 months following the events. These results suggest that high media coverage may imply both more efficient market reactions at the time of the announcements and lower undervaluation prior to the announcements, resulting in a negative association between media coverage and post-announcement price drifts. These results are also consistent with Yook (2010) who finds that only firms that actually repurchased shares experienced significant long-term abnormal returns.

Although scholars have explored financial media as a potential determinant of the success of other corporate events, and despite the fact that share repurchases are among the corporate events that receive the most business media attention, (2) the role that media and, more broadly, investor attention, have on share repurchase activity has remained largely unexplored in the financial literature. Here lies the main contribution of this paper to the financial literature. I also contribute to the growing literature on the media and its influence in stock prices, however, in contrast to previous literature that uses news articles published in major newspapers (e.g., Tetlock, 2007; Tetlock, Saar-Tsechansky, & Macskassy, 2008; Fang & Peress, 2009), I focus on firmspecific public news that professional traders receive electronically in real time.

I structure the remainder of the paper as follows. Section 2 develops the hypotheses. Section 3 introduces the empirical methodology. Section 4 presents the data sets I use in the empirical analysis. Section 5 establishes the key empirical results. The last section contains a summary and concluding remarks.

2 Hypotheses development

Undervaluation appears to be one of the most important factors in firms' decisions to repurchase shares. Peyer and Vermaelen (2009) show that in nearly 50 percent of the cases, firms explain their motivations for repurchases by mentioning "undervaluation" and "best use of money" in their press releases. Furthermore, Survey evidence by Brav, Graham, Harvey, and Michaely (2005) report that 86 percent of the respondents find the "market price" of their stock is an important or a very important factor in their companies' repurchasing decisions ("market price" meaning "if our stock is a good investment relative to its true value").

Vermaelen (1984) took the first theoretical approach to model share repurchases as the result of stock undervaluation. In his model, managers of undervalued firms, who are trying to maximize the value of their stock options and prevent takeover bids, will convey the inside information using share repurchases as a signaling mechanism. According to the signaling theory, two types of signals are available: costly and costless signals. An early example of costly signaling in capital markets was provided by Ross (1977); Ross showed how managers can use debt as a signal to separate profitable from insolvent companies, resulting in a positive relationship between a firm's value and leverage. Costless, non-binding signals...

Para continuar a ler

PEÇA SUA AVALIAÇÃO

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT