Sensitivity to investor sentiment and stock performance of open market share repurchases

•The stocks of repurchasers with high sensitivity to sentiment tend to be mispriced.•Investor sentiment helps to explain the post-repurchase abnormal returns.•This stock outperformance is not driven by book-to-market or prior return effects.•This undervaluation results from the difficulty to value a...

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Bibliographic Details
Published in:Journal of banking & finance 2016-10, Vol.71, p.75-94
Main Author: Liang, Woan-lih
Format: Article
Language:English
Subjects:
Abnormal returns
Arbitrage
Investments
Investor behavior
Investor sentiment
Mispricing
Repurchases
Studies
Treasury stock
Undervaluation
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Summary:•The stocks of repurchasers with high sensitivity to sentiment tend to be mispriced.•Investor sentiment helps to explain the post-repurchase abnormal returns.•This stock outperformance is not driven by book-to-market or prior return effects.•This undervaluation results from the difficulty to value and/or limits to arbitrage. This paper finds that stocks of repurchasers with high sensitivity to investor sentiment are more likely to be mispriced. Thus, such repurchases are followed by superior post-buyback stock performance. This abnormal return associated with sensitivity to sentiment cannot be explained by other undervaluation factors: book-to-market or prior return effects. My results are robust with factor model analysis and controls for contamination effects. I conclude that this sentiment-driven undervaluation may result from the difficulty to value and/or limits to arbitrage rather than investor overreaction.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2016.06.003