**4. Methods and Results**

Fu and Huang (2016) report the disappearance of long run abnormal returns following stock repurchase programs from 2003 to 2012. They argue that the U.S. stock markets have become more efficient since 2003 due to several regulatory changes, such as the decimalization of stock prices and the enactment of the Sarbanes–Oxley Act of 2002 (SOX). These are expected to affect not only market and regulatory environments, but also reduce managers' incentives to manipulate earnings. Thus, to examine whether the lower cumulative announcement period return is attributed to increased efficiency of the U.S. stock market since 2003, this study splits per year announcement period returns based on whether they are the first or subsequent announcements made by the repurchasing firms.

The results, as reported in Table 2, show that, on average, subsequent announcement returns are significantly lower than those of initial announcements at the 95% confidence level. These results remain consistent when the sample is sorted based on pre- and post-2003 periods. Hence, the findings suggest that the increased efficiency of the U.S. stock market alone cannot explain the decline in open market repurchase announcement period returns, but that subsequent announcements may also explain the lower repurchase announcement period returns. We also find that the average announcement returns in the 2003–2014 period (post-SOX) are significantly lower than those in the 1996–2002 period for both the first and subsequent repurchase announcements.


**Table 2.** First and subsequent market-adjusted announcement returns.

This table displays the cumulative market-adjusted returns (0, +1) from first and subsequent open market share repurchase announcements and the difference between the two. It also shows the difference of the average announcement returns between the two sub-periods. \*\*\* and \*\* denote statistical significance at the 1% and 5% respectively.

Panel A of Table 3 shows the differences of announcement returns sorted by firms that announce only one repurchase during the sample period versus firms that repeat their repurchase announcements. The cumulative abnormal return of open market repurchase programs announced by firms that do not repeat their open market repurchase programs is 3.56% and significantly higher than that of firms that repeat their announcements (1.83%), which is consistent with the findings of Jagannathan and Stephens (2003). In Panel B, announcement returns are sorted based on the order of repeat announcements. On average, repeat repurchasers earn 2.51% from their initial announcements. The average cumulative abnormal return in the second announcements, however, drops significantly to 1.77%. Third announcements experience a further decline in cumulative announcement return to

1.25%. The cumulative announcement return continues to decline when firms announce more open market repurchase programs (0.89%).


**Table 3.** Cumulative abnormal announcement returns (0, +1).

Abnormal returns are measured as market-adjusted returns. ONLY ONE is firms that announce one repurchase during the sample period. REPEAT is firms that announce to repurchase the first time and will repeat during the sample period. Initial announcement is the first announcement made by repeat repurchasers. Second announcement is the second announcement made by repeat repurchasers. Third announcement is the third announcement made by repeat repurchasers. \*, \*\*, \*\*\* denote statistical significance at the 10%, 5% and 1%, respectively.

To examine if the declining subsequent announcement returns are attributed to hubristic bias, this study sorts the announcement returns based on the sign of past announcement returns. Panel A of Table 4 shows that the mean (median) return of the second repurchase announcements of firms that experience a negative announcement return from their initial announcements is 1.59% (1.29%) during the two-day announcement window period. When firms make subsequent announcements, their mean (median) announcement return drops significantly to 0.16% (−0.16%) during the two-day window period. However, there is no evidence of decreasing subsequent announcement returns for firms with positive past announcement returns (Panel B). These results suggest that the decreasing subsequent announcement returns can be attributed to firms experiencing negative past announcement returns that keep repeating their repurchase programs.


**Table 4.** Announcement returns sorted by past announcement returns.

\*\*\* and \*\* denote statistical significance at the 1% and 5% levels, respectively. † denotes significance at the 1% level, based on Wilcoxon *p*-values for the median.

Table 5 shows the descriptive statistics of the sample sorted by the frequency of announcements made by repurchasing firms. Consistent with prior studies, repeat repurchasing firms are bigger, more profitable, have more free cash flows, have higher growth opportunities, and are less underpriced than those of non-repeat repurchasing firms (the mean of RUNUP is −7.3% vs. −9.2%, respectively). The less underpricing of repeat repurchasing firms suggests that the motivation of firms that frequently announce open market share repurchase programs may be less attributable to undervaluation but seems to be more consistent with the distribution of excess cash flows. According to the free cash flows hypothesis, when there are no growth opportunities available, managers distribute excess cash to the firm's shareholders to maximize their firm value. These firms, however, have higher and increasing growth opportunities than non-repeat repurchasing firms as indicated by their book-to-market ratios. Thus, instead of investing in the real sectors, these firms choose to invest in the firms' stocks by announcing subsequent repurchase programs, which is inconsistent with the free cash flow hypothesis but is more consistent with the hubris bias hypothesis.


**Table 5.** Descriptive statistics.

ONLY ONE refers to firms that announce only one repurchase during the sample period. Initial announcement is the first announcement made by repeat repurchasers. Second announcement is the second announcement made by repeat repurchasers. Third announcement is the third announcement made by repeat repurchasers. CASHFLOW is measured as cashflows/total assets. B/M is book-to-market ratio. DIVYIELD is dividend/market value of equity at time t − 1. LEVERAGE is total debt/total assets. SIZE is the natural logarithm of market value of equity in the quarter prior to announcement quarter. ΔSALES is change in sales/total assets. ROA is return on assets. All accounting variables are measured in the quarter prior to the announcement quarter. RUNUP is cumulative market-adjusted return measured from −46 to −6. STDEV is the standard deviation of market-adjusted return measured from day −100 to −46. SIZEPROG is the size of the repurchase program, measured as percentage of shares authorized at announcement.

Table 5 also shows that the stock performance of repeat repurchasers prior to subsequent announcements (RUNUP) is negative. The hubris bias hypothesis predicts that when hubristic managers believe their firms' shares are undervalued, they are likely to repurchase shares by repeating their repurchase program. Furthermore, due to their illusory belief that they can repeat their past success of announcing such programs, these managers may also increase the size of their repurchase programs in subsequent announcements. The size of the repurchase program (SIZEPROG) reported in Table 5 is consistent with this conjecture. The size of the programs announced by repeat repurchasers from the initial announcement to subsequent announcements increases from 6.78% of the total outstanding shares to 7.50% in subsequent announcements, and further up to 7.69% for more than three subsequent announcements.

The results displayed in Table 5 suggest that firm characteristics of repeat repurchasers are different from those of non-repeat repurchasers and that they have the propensity to repeat open market share repurchase programs. Hence, this study conducts a logit analysis to examine the determinants or the likelihood of these firms to announce a share repurchase program:

> *REPEAT REPURCHASE* = α + β*1RUNUP* + β*2SIZE* + β*3B*/*M* + β*4SIZEPROG* + <sup>β</sup>*5LEVERAGE* <sup>+</sup> <sup>β</sup>*6STDEV* <sup>+</sup> <sup>β</sup>*7ROA* <sup>+</sup> <sup>β</sup>*8OPTION* <sup>+</sup> *Industry and Year Control* <sup>+</sup> <sup>ε</sup> (1)

where *REPEAT REPURCHASE* is a dummy of 1 for announcements made by repeat repurchasers.

The results reported in Table 6 are consistent with the firm characteristics reported in Table 5. RUNUP is positively related to the likelihood to a repeat repurchase, suggesting that repeat repurchasers are not motivated by under-performance. Large firms with large cash flows are more likely to repeat share repurchase programs. Firms repeating repurchase announcements are also likely to increase their program size.


**Table 6.** The determinants of repeat repurchases.

Logit analysis of the determinants of repurchasing made by repeat repurchasers. The dependent variable is one for repurchases made by repeat repurchasers. RUNUP is cumulative market-adjusted return measured from −46 to −6. CASHFLOW is measured as cashflows/total assets. SIZE is the natural logarithm of market value of equity in the quarter prior to announcement quarter. B/M is book-to-market ratio. ΔSIZEPROG is the change in program size. LEVERAGE is total debt/total assets. STDEV is the standard deviation of market-adjusted return measured from day −100 to −46. ROA is return on assets. OPTION is a dummy variable of one if the motivation to conduct a share repurchase program is related to stock options. *p*-values are in parentheses. \*\*\*, \*\*, \* denote statistical significance at the 1%, 5%, and 10%, respectively.

To examine whether hubris explains the lower subsequent repurchase announcement returns, this study controls for the probability of repeating a repurchase program measured by the fitted value from the logistic regression reported in Table 6. If the market is able to anticipate that a subsequent repurchase program would be launched by a repeat repurchaser, then the coefficient of this variable should be significantly related to the announcement period return and that the market should not react significantly to subsequent or repeat share repurchase announcements.

The results of cross-sectional regressions of share repurchasers' announcement abnormal returns on hubris and control variables are reported in Table 7. Consistent with the second hypothesis, the results show that the decreasing subsequent announcement period returns are attributed to hubris-endowed managers. The coefficients of the probability of repeating a repurchase are not statistically significant, suggesting that the market may fail to anticipate subsequent repurchase announcements. The last column in Table 7 shows that firms that repeat their repurchase announcements within a shorter period experience significantly lower returns, which is consistent with the third hypothesis.


**Table 7.** Regressions of repeat repurchasers' abnormal returns.

The dependent variable is cumulative abnormal return (0, +1). ENDWHUBRIS is one if a past repurchase announcement return is negative. TBD is the number of days between two announcements. RUNUP is cumulative market-adjusted return measured from −46 to −6. SIZE is the natural logarithm of market value of equity in the quarter prior to announcement quarter. B/M is book-to-market ratio. LEVERAGE is total debt/total assets. STDEV is the standard deviation of market-adjusted return measured from day −100 to −46. ΔSIZEPROG is the change in program size. OPTION is a dummy variable of one if the motivation to conduct a share repurchase program is related to stock options. CASHFLOW is measured as cashflows/total assets. Pr (repeat repurchase) is the estimated probability of a repeat repurchase based on the logit results presented in Table 6. \*, \*\*, \*\*\* denote statistical significance at 10%, 5%, and 1%, respectively.

#### *Robustness Tests*

The sample period starts from the beginning of 1996. However, there could be a concern that this might not be representative of the start of an initial open market repurchase program. For added robustness, this study follows (Song and Walkling 2000; Cai et al. 2011; Aktas et al. 2013) by imposing an initial time lag of two years (1996 and 1997) during which time the repurchasing firms are not active. Only those firms that have not undertaken any transactions during the initial dormant period (1996 and 1997) are included in the sample. The results are similar to those reported in the main analysis.

Additionally, this study redefines the measure for repeat repurchasers as firms that announce subsequent open market share repurchase programs within five years of their initial issue. Although this alternative measure may suffer from a sample selection bias due to the restriction, this study finds that the results are also similar to those already reported. This study also considers the average abnormal returns on the announcement day (day 0) and three (−1, +1), four (−2, +2), and ten (−5, +5) days of return window periods in the analysis and finds that the results remain the same.

The present study examines managerial hubris at the firm level for several reasons. First, the most popular proxy for hubris at the CEO level is the option-related measure developed by Malmendier and Tate (2005). However, according to Malmendier and Tate (2015), Execucomp data prior to 2006 cannot be used to calculate this measure, while noting that our sample period runs from 1996 to 2014. Second, a recent study by Bayat et al. (2016) suggests that this option-based measure does not accurately measure hubris at the CEO level; rather, it measures firm characteristics. They find that CEOs who are considered hubristic according to the option-based measure are not considered as hubristic when they change their affiliation.

As prior studies suggest that hubristic managers with large cash flows tend to over-invest, therefore, we consider hubristic managers as those in firms that have the highest investments. Following Campbell et al. (2011), we measure a firm's industry-adjusted investments as the difference between the firm's capital expenditures scaled by its beginning of year gross property, plant, and equipment (PPE), and the average industry investment based on 2-digit Standard Industrial

Classification (SIC) codes. These variables were downloaded from the Research Insight database and matched the variables to the final sample. This study then creates quintiles based on the industry-adjusted investments and examine only those firms that belong to the highest quintile (the largest investments) as they are considered to have hubris bias. The matching procedure and examining only the highest quintile, however, reduce the number of observations quite significantly. After re-running the regression models, we find similar results. The endowed hubris variable is significantly and negatively associated with the announcement period cumulative returns.

The other two proxies are a dummy variable of 1 for subsequent announcements as hubristic managers are expected to repeat a repurchase program and the number of previous repurchase announcements. A manager who has experience in launching more than one share repurchase program can develop hubris bias and feel more confident in repeating a program but result in negative announcement returns. The results are like those reported earlier. Both proxy variables are negatively related to the announcement period returns; however, only the coefficient of the dummy variable is statistically significant.

For added robustness, we include a time trend (TREND) in place of year effects in Table 7. The results shown in Table 8 are consistent with the earlier findings, albeit with a slight reduction of significance (*p*-value of 0.053) for ENDWHUBRIS.


**Table 8.** Regressions of repeat repurchasers' abnormal returns with time trend.

\*, \*\*, \*\*\* denote statistical significance at 10%, 5%, and 1%, respectively.

#### **5. Conclusions**

This paper examines open market share repurchase announcements from January 1996 to September 2014. This paper documents that repeat announcements, which generate decreasing announcement returns, dominate the number of open market share repurchase announcements in the later period. Large firms with large cash flows are more likely to repeat share repurchase programs. Firms repeating repurchase announcements are also likely to increase their program size. This paper also finds that the decreasing announcement returns are attributable to subsequent announcements made by firms experiencing negative past repurchase announcement returns.

Our results are robust to alternative definitions of repeat purchases and are consistent with the notion that managers endowed with hubris or self-confidence drive the declining wealth of repeat repurchasing firms' shareholders. A word of caution is in order. Corporate board members should be more mindful of the adverse impact of repeat share repurchases made by their over-confident managers to shareholders before approving such offers.

We acknowledge the limitation in the sampling period of our study and recommended future research to include data from more recent years. It would also be interesting to compare the results of this study to those in other countries that may have a similar regulatory framework to see if the conclusions are similar.

**Author Contributions:** Data curation, D.K.D.; formal analysis, D.K.D., H.K. and C.K.; methodology, H.K. and C.K. All authors have read and agree to the published version of the manuscript.

**Funding:** This research received no external funding.

**Conflicts of Interest:** The authors declare no conflict of interest.

#### **References**


Vermaelen, Theo. 1981. Common stock repurchases and market signaling. *Journal of Financial Economics* 9: 139–83. [CrossRef]

Yook, Ken C., and Partha Gangopadhyay. 2011. A comprehensive examination of the wealth effects of recent stock repurchase announcements. *Review of Quantitative Finance and Accounting* 37: 509–29. [CrossRef]

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