Does Share Buyback Deter Takeovers? From Ex Ante to Ex Post

• In Event: Understanding Real Earnings Management

Abstract

We examine whether share buyback is an effective deterrent of takeover attempts, controlling for the endogeneity of share repurchasing. We find that, share buyback does not reduce the ex post takeover probability for the whole sample of firms, however, buying back shares deters the ex post takeover bids among the firms with high ex ante takeover likelihood. If a firm with high ex ante takeover likelihood conducts share repurchases, the probability of its receiving ex post bids decreases by more than 25% of the average takeover probability. Furthermore, firms with greater ex ante takeover likelihood pay a higher price to buy back their shares. In addition, when compared to their non-repurchasing matches based on the ex ante takeover probability, repurchasing firms increase leverage and decrease cash holdings.

Authors

• Yingmei Cheng, Florida State University

• Tianming Zhang, Florida State University