**1. Introduction**

SEC Rule 10b-18 of the United States' Securities and Exchange Commission, introduced in 1982, allows a company to announce its intention to repurchase its shares at the going market price. Market reactions to open market share repurchase announcements in the 1980s were very positive with average cumulative announcement returns recorded of more than 3 percent (see, for example, (Vermaelen 1981; Ikenberry et al. 1995)).<sup>1</sup> Since then, however, the cumulative abnormal announcement returns are reported to decline over the years with average cumulative announcement returns of around 1% in 2004 (Bonaimé 2012; Yook and Gangopadhyay 2011). The goal of this paper is to explain why some firms, in light of the evidence of declining average announcement period returns, continue to repeat their open market share repurchases.

What has caused the depletion of open market repurchase announcement returns? One possible explanation is that it could be related to the increasing number of frequent repurchase announcements.<sup>2</sup>

<sup>1</sup> The main motive for open market share repurchases is mainly either to buy back undervalued stocks (Lakonishok and Vermaelen 1990; Peyer and Vermaelen 2009), or to distribute temporary free cash flows, in lieu of dividends, to shareholders (Stephens and Weisbach 1998; Dittmar 2000; Skinner 2008). Other theories used to explain repurchases are: (1) to improve their leverage ratios (Bagwell and Shoven 1988); (2) to discourage takeover attempts (Bagwell 1991); and (3) to counter the dilution effect of stock option plans (Fenn and Liang 2001; Kahle 2002).

<sup>2</sup> Another possible explanation could be due to lower past repurchase completion rates. (Bonaimé 2012; Mishra et al. 2011; Chang et al. 2010) argue that when a firm launches an open market share repurchase program but does not follow it through

Jagannathan and Stephens (2003) find that the market reacts less positively to announcements made by frequent repurchasers than to those made by non-frequent repurchasers. The number of frequent repurchase announcements in their sample, during the period from 1986 to 1996, accounts for about half of their total sample. Since 2003, however, the frequency of announcing subsequent open market repurchase programs is reported to have been increased substantially (Fu and Huang 2016).3

Busch and Obernberger (2017) document that share repurchases help to maintain accurate stock prices by providing price support at fundamental values. They find no evidence of managers using share repurchases to manipulate stock prices when selling their equity holdings or exercising stock options. Similarly, Liu and Swanson (2016) provide evidence that a key motive for increasing share repurchases is to provide price support.

If the market reacts less favorably to subsequent repurchase program announcements, why would some firms keep repeating such a program? Ben-David et al. (2007) argue that hubristic managers are not only responsive to excess cash flows, but also prone to believe that their firms' stock prices are less than what they should be and are likely to communicate their (biased) belief to the market by launching open market repurchase programs.<sup>4</sup> Ben-David et al. (2007) argument is consistent with Jagannathan and Stephens (2003) findings that repeat repurchasing firms have large excess cash flows and high growth opportunities. As empirical evidence in the literature suggests that hubristic bias is pervasive among managers,5 this paper examines whether managerial hubris bias can explain the decreasing magnitude of open market repurchase announcement period returns. The empirical results are consistent with this conjecture.

It should be pointed out that the term *hubris* has been used in the context of takeovers by Roll (1986) to describe the managerial motive behind takeovers. *Managerial hubris* refers to overconfident managers who attribute their success to their individual superior abilities. There is no direct instrument available to measure CEO/managerial hubris. Prior work has used the following indicators to infer managerial hubris: recent organizational success (Meindl et al. 1985; Hayward and Hambrick 1997), recent media praise (Chen and Meindl 1991; Salancik and Meindl 1984), CEO's self-importance (Manfred et al. 1984; Miller and Droge 1986; Finkelstein 1992), and the moneyness of CEO's option (Kim et al. 2016). Following these works, particularly Hayward and Hambrick (1997), we infer about managerial hubris based on a firm's prior performance.

This paper finds that, during the sample period from 1996 to 2014, the number of repeat or subsequent open market repurchase announcements has been increasing over the years. On average, the number of repeat announcements in a year accounts for about 68% of total open market repurchase

or repurchase less than the number of shares announced in the program, the market considers the firm as having a bad reputation. Consequently, the market will react less favourably when the firm announces a subsequent open market share repurchase program. Low past completion rates, however, cannot explain why some firms keep repeating open market repurchase programs. If the motivation to repurchase is related to stock undervaluation, which is one of the most common motives to launch an open market repurchase program, a positive market reaction to the repurchase announcement may be sufficient for the announcing firm to not fully follow through on its announced repurchase plan, and therefore may explain its lower repurchase completion rate. Similarly, if a firm's subsequent open market repurchase program is motivated by distributing excess cash flows or stock options, it should not have a low repurchase completion rate.

<sup>3</sup> A similar pattern has also been observed in the Swedish stock market. De Ridder and Rasbrandt (2014) find that repeat repurchasers make two out of three Swedish share repurchase announcements.

<sup>4</sup> For the purposes of the current research work, we refer to hubris as an individual's personal attribute of self- or over-confidence. We define the term managerial hubris as the over-confident behavior of corporate managers.

<sup>5</sup> The finance literature documents that some managers are prone to self-attribution bias, which leads them to be hubristic. Ben-David et al. (2007) find that among other corporate actions, these managers are more likely to be associated with less efficient investments. Hayward and Hambrick (1997) find that CEO's hubris (or exaggerated self-confidence) is strongly positively associated with the size of premiums paid for acquisitions. Malmendier and Tate (2008) find evidence consistent with the view that hubristic CEOs overestimate their ability to generate returns. Hence, they overpay for target companies and undertake value-destroying mergers. Another managerial trait—CEO narcissism—has also been shown to be positively related to the number and size of acquisitions. (Chatterjee and Hambrick 2007; Billett and Qian 2008; Karolyi et al. 2015) find evidence consistent with hubristic managers explaining the declining returns of serial acquirers. Recent work by Aktas et al. (2016) show that both acquirer and target CEO narcissism affect the characteristics of the takeover process. No prior studies have studied stock repurchases using the lens of managerial hubris.

announcements.6 Consistent with prior studies, compared with firms that do not repeat share repurchase announcements, firms that repeat their share repurchase programs have higher growth opportunities, have more free cash flows, are more profitable, less undervalued, larger, and have significantly lower cumulative abnormal announcement period returns (3.56% vs. 1.83%, respectively). It is, therefore, an empirical question why such firms, having high growth opportunities and large cash flows, would keep investing in their own stocks rather than investing in the real sector.

This paper documents firms that repeat open market share repurchase programs experience an average cumulative announcement period abnormal return of 2.51% from their initial announcement. However, when these firms repeat their repurchase programs, the market reacts less favorably to the second announcement, that the cumulative announcement period return drops significantly to 1.77%. The cumulative announcement period return continues to drop further to only 0.89% when firms make five or more open market repurchase announcements. In a further analysis, this study finds that firms with negative past announcement returns experience decreasing subsequent announcement returns, which is consistent with the notion that managers endowed with hubris are associated with decreasing subsequent announcement returns.

This study sheds light in explaining the declining open market share repurchase announcement returns and attempts to contribute to the literature in several aspects. First, this study employs a more recent sample period (from 1996 to 2014) and documents that the number of repeat open market share repurchase announcements has significantly increased over the years, suggesting that there is a systematic change in repurchasing behavior during the sample period. Second, the present study is the first to document that, not only the announcement returns of repeat announcements are lower than those of non-repeat announcements, but also that the magnitude of subsequent announcement returns is decreasing significantly. Third, this paper proposes a managerial motivation bias to explain the increasing number of repeat open market share repurchase programs. The empirical results are consistent with the hubris bias hypothesis that firms with managers endowed with hubris bias and equipped with excessive cash flows, are more likely to repeat their open market share repurchase programs even though their decisions generate lower subsequent announcement returns.

The rest of the paper is organized as follows. Section 2 develops and discusses the hypotheses. Section 3 describes the sample and data collection processes. The empirical results are reported in Sections 4 and 5 concludes.
