**2. Hypothesis Development**

The literature documents that firms that repeat their repurchase programs have higher growth opportunities, have more free cash flows, are less undervalued and are larger than those with infrequent repurchases (Jagannathan and Stephens 2003). Firms with such characteristics provide an ideal research setting for examining the *managerial hubris hypothesis* in subsequent share repurchase programs as hubristic managers are significantly more responsive to the generation of excess cash flows by their firms and tend to over-invest by repurchasing their firms' shares (Ben-David et al. 2007; Malmendier and Tate 2005; Campbell et al. 2011).7 Supported with large amounts of free cash flows, managers may feel confident in their ability to meet the firm's obligations and may also be over-confident in using the excess free cash flows on a subsequent open market repurchase program when they believe their firms' equity value is underpriced, regardless of firms' high growth opportunities and could have

<sup>6</sup> Drops only in 1998 and 1999 to less than half of the total announcements in a year (48% and 45%, respectively).

<sup>7</sup> Lehn and Poulsen (1989) find that firms with undistributed free cash flows tend to pay a significant premium for stock repurchases related to going private transactions. Howe et al. (1992) investigate whether Jensen (1986) free cash flow theory explains the market reaction to tender offer share repurchases and specially designated dividends where the cash distribution is not expected to be repeated. They find that free cash flows do not explain the announcement returns very well and conclude that their results are inconsistent with Jensen's free cash flow hypothesis but consistent with the information-signaling hypothesis. They offer the entrenchment hypothesis as a possible explanation for their conflicting findings with those of Jensen's.

invested in real capital projects instead. If a repeat repurchase program is not in the best interest of shareholders, the market will react less favorably to a firm's subsequent announcement. As such, we test the following hypothesis:

**Hypotheses 1 (H1).** *Subsequent open market repurchase announcements by hubristic managers will experience lower announcement period returns due to their overpayment for the shares.*

Managers may develop a hubris bias when their previous open market repurchase program is successful (learning hubris) and, therefore, may overestimate their ability to repeat their previous success by launching a subsequent repurchase program. On the other hand, managers can also be hubristic if they are already endowed with it. Prior studies in the psychology literature document that people endowed with hubris are likely to ignore negative feedback of their behavior (Snyder et al. 1977; Swann and Read 1981; Taylor and Gollwitzer 1995). Thus, managers endowed with hubris are likely to ignore negative feedback from the market (Roll 1986; Billett and Qian 2008). Because they are biasedly optimistic about their ability to succeed, even though their firm's past announcement return from the previous program is negative, if they believe that their current stock price is undervalued, they would likely attempt to correct the stock price by repeating a repurchase program. Therefore, we expect that the subsequent announcement returns of such firms to be lower, or even negative. Thus, the second hypothesis is:

**Hypotheses 2 (H2).** *If repeat repurchase announcements are attributed to endowed hubris, then firms with negative past announcement period returns will experience even lower subsequent announcement returns.*

Managers with endowed hubris bias may likely repeat a subsequent share repurchase announcement within a shorter period, as they would like to repeat their previous success. The shorter the number of days between a previous and a current announcement, the lower is the expected current announcement period return. Consequently, the third hypothesis is:

**Hypotheses 3 (H3).** *The time between two subsequent announcements is positively related to the announcement period return.*
