Strategic Communications and Marketing News Bureau

Study: Some stock repurchase plans just empty promises

CHAMPAIGN, Ill. – A new study backs longtime speculation on Wall Street that companies sometimes ballyhoo stock repurchase programs they never plan to pursue, hoping to stir a buzz that will mislead investors and pump up sagging share prices.

But phantom repurchase programs are rare, and most are rooted in sound economic motives that generally pay off for both companies and investors, said David Ikenberry, a University of Illinois finance professor and researcher for the study.

“The good news is that the vast majority of repurchase programs are solid and well intentioned,” he said. “But there appear to be a handful where companies are indeed trying to mislead the market. They’re down on their luck and hoping a repurchase announcement will spark a price reaction that might not be warranted.”

Among other reasons, firms routinely launch buybacks when they perceive that shares are undervalued, said Ikenberry, whose study will appear in the Journal of Corporate Finance. Buybacks can provide a competitive return by reducing publicly held stock, boosting per-share earnings even if profits remain the same.

In those cases, announcements of repurchase plans are often greeted as a bullish signal, sparking bargain hunting by investors that drives up share prices, said Ikenberry, who has studied stock repurchase programs for 15 years.

But he says Wall Street analysts have long worried the positive market reaction could also spawn abuse, encouraging troubled firms to tout repurchase programs they have no intention of following through on.

“The concern has always been that there is no requirement that these buybacks ever be completed,” Ikenberry said. “So you have this potential for cheap talk and empty promises by firms who are down on their luck and just looking for a quick fix.”

He says those suspicions are supported by a study of more than 7,600 repurchase programs announced between 1980 and 2000, which found that firms showing signs of financial distress are less likely to follow through on buybacks.

Firms that used aggressive accounting accruals to pad earnings but still saw stock prices decline repurchased fewer shares than healthy companies, according to the study, co-written by business professors Konan Chan, of the University of Hong Kong, Immoo Lee, of the National University of Singapore, and Yanzhi Wang, of Yuan Ze University.

“This paints a picture of companies that are struggling and their stock prices are falling even though they’re doing everything they can to pump up earnings,” Ikenberry said. “Announcing a share repurchase may be just one more public relations tool in their effort to turn the tide.”

He says the study is the first empirical review of repurchase programs that have the potential to be misleading, and was sparked by long-standing concerns among analysts, scholars and observers such as Jim Cramer of CNBC’s “Mad Money.”

“By definition, there can be no smoking gun with the tools we have,” Ikenberry said. “Yet we do have compelling circumstantial evidence, and find a limited number of cases where it’s plausible that some misleading behavior on the part of management did occur.”

Investors can guard against buying into phantom repurchase programs through due diligence, he said. Warning signs include strong earnings despite weak cash flow, indicating aggressive accounting practices, coupled with a long-term pattern of languishing stock value.

But Ikenberry says the study shows that deceptive repurchase programs are the exception not the rule, and cause no long-term harm to the market. While stock prices often surge with the repurchase announcement, they soon dip if earnings fail to support the increase.

He compares the market’s rise and fall to long lines that follow hype for a new restaurant.

“If the food turns out to be good, business will stick and there will be lines for a long time,” Ikenberry said. “But if it’s not good food, the hype and buzz will fade and business will, too.”

Read Next

Health and medicine Dr. Timothy Fan, left, sits in a consulting room with the pet owner. Between them stands the dog, who is looking off toward Fan.

How are veterinarians advancing cancer research in dogs, people?

CHAMPAIGN, Ill. — People are beginning to realize that dogs share a lot more with humans than just their homes and habits. Some spontaneously occurring cancers in dogs are genetically very similar to those in people and respond to treatment in similar ways. This means inventive new treatments in dogs, when effective, may also be […]

Honors From left, individuals awarded the 2025 Campus Awards for Excellence in Public Engagement are Antoinette Burton, director of the Humanities Research Institute; Ariana Mizan, undergraduate student in strategy, innovation and entrepreneurship; Lee Ragsdale, the reentry resource program director for the Education Justice Project; and Ananya Yammanuru, a graduate student in computer science. Photos provided.

Awards recognize excellence in public engagement

The 2025 Campus Awards for Excellence in Public Engagement were recently awarded to faculty, staff and community members who address critical societal issues.

Uncategorized Portrait of the researchers standing outside in front of a grove of trees.

Study links influenza A viral infection to microbiome, brain gene expression changes

CHAMPAIGN, Ill. — In a study of newborn piglets, infection with influenza A was associated with disruptions in the piglets’ nasal and gut microbiomes and with potentially detrimental changes in gene activity in the hippocampus, a brain structure that plays a central role in learning and memory. Maternal vaccination against the virus during pregnancy appeared […]

Strategic Communications and Marketing News Bureau

507 E. Green St
MC-426
Champaign, IL 61820

Email: stratcom@illinois.edu

Phone (217) 333-5010