Managerial Ability and Stock Repurchase Completion Rates: An Empirical Investigation

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Abstract

We investigate the role of managers in stock repurchases by examining how managerial ability influences the capacity and incentive to follow through on announced repurchase plans. Repurchase announcements have recently come under scrutiny for lacking credibility. Managers’ ability to adapt to cash flow is a critical component of the repurchase decision process, which is not directly observable by external stakeholders. We find that within a firm, a change in managerial ability is correlated with a change in completion rate after controlling for endogeneity, consistent with the incentive for reputation protection. Furthermore, we show that the effect of managerial ability on the completion rate is more pronounced for firms that have more uncertain cash flows. These findings indicate that the completion rate is potentially an observable signal of managers’ broader ability to adapt to cash flows variability. Finally, we show that the effect of managerial ability is more pronounced for better-governed firms, suggesting rent extraction cannot explain our results.

Authors

• Jian Cao, Florida Atlantic University - Boca

• Yun Cheng, University of West Georgia

• Joanna Golden, University of Memphis

• Joseph H. Zhang, University of Memphis