| Abstract: | Empirically, a price increase accompanies the announcement ofan open-market stock repurchase program, even though the announcementis not a commitment. In fact, for many announced programs noshares are ever actually repurchased. This article exploresthis puzzle. In the single-firm-type version of the model, theoption that a firm grants itself by announcing a program doesnot generate announcement returns. In equilibrium, long-rungains from the informed trading that the option creates areoffset by short-run costs from the market's accounting for thisadverse selection. Based on this trade-off, I construct a signaling(two-type) model that can deliver announcement returns. In theseparating equilibrium, good firms do not incur any cost whenthey announce programs. Their gains from informed trading inthe long run offset the cost of announcement incurred in theshort run. Mimicry is costly, because a bad firm's long-rungains from informed trading cannot compensate for the short-runcost of announcing. |
