Robustness tests - Managerial Overconfidence and the Buyback Anomaly

Our benchmark measure for the degree of managers’ confidence is the press-based measure. As robustness tests, we employ two additional measures, namely the options-based measure of, for example, Malmendier and Tate (2008), and Malmendier, Tate, and Yan (2011), and the gender-based measure of Barber and Odean (2001) and Niederle and Vesterlund (2007).

5.4.1 Options-based measure for managerial overconfidence

The results when using the options-based measure are presented in Table 8. Consistent with the results when employing the press-based measure in Table 3, Table 8 shows a large difference in the post-announcement abnormal returns between overconfident and underconfident managers when using the Carhart (1997) four-factor model to estimate abnormal returns.

Interestingly, different from Table 3, the difference in abnormal returns is statistically significant already at the 12-month horizon, where the abnormal returns of underconfident managers are more than twice larger than those of overconfident managers. The outperformance of stocks of underconfident managers rises with the horizon in terms of economic and statistical significance, and peaks at the 48-month. At that horizon, the abnormal returns of overconfident

managers are 9.25% as opposed to 27.38% for underconfident firms, both statistically significant, and the difference between the two is highly statistically significant with a z-test value of 3.45.

5.4.2 Gender-based measure for managerial overconfidence

Table 9 shows the results for the gender-based measure for managerial overconfidence. The results are largely consistent with the results in Tables 3 and 8. As seen in Panel A of Table 9, abnormal returns are on average lower when the executive teams comprise of only males. When the executive teams are mixed abnormal returns are higher for all horizons, although the differences in most of these cases are not statistically significant. The results in Panel B are similar. When both the CEOs and CFOs are males, abnormal returns are lower. Panel C presents very similar results when employing the gender of the CFO as a measure for the degree of confidence.

6. Conclusion

In this paper, we provide empirical evidence consistent with Chan, Ikenberry and Lee (2004) and Peyer and Vermaelen (2009) that the buyback anomaly is being driven by mispricing. This hypothesis suggests that the managers of announcing firms perceive their stocks to be undervalued by the market and announce a stock repurchase in order to signal the misvaluation.

If this is the case, then signals sent by an overconfident manager will be less credible to the market, and we would expect to see lower cumulative abnormal returns after the announcement.

If the announcement is, however, made by an underconfident manager, then the market will be more likely to believe the signal since it will probably contain more objective information, and we should see higher abnormal returns. Using a press-based measure for managerial overconfidence, we provide evidence that while positive, the post-buyback announcements abnormal returns are substantially lower when CEOs are classified as overconfident.

To further explore this finding, we divide the announcing firms according to various criteria that classify the firms by their difficulty to be valued and the likelihood of being underpriced. The underperformance of firms with overconfident CEOs is particularly strong for young, small, high book-to-market, and non-dividend paying firms all of which are difficult to value. Intuitively, when CEOs are overconfident they are likely to disregard the information

given by the market price especially when valuation is difficult. However, when CEOs are underconfident, they are more cautious and carefully consider each piece of information available in their decision processes, including the market price. On the other hand, when firms are easier to value, overconfident CEOs know that the market price is based on a better quality of information, and are less likely to disregard the market price. In addition, we also find that the difference in cumulative abnormal returns following repurchase announcements made by overconfident and underconfident CEOs is larger for those firms whose stocks have performed poorly in the 6 months previous to the announcement, and for those that have high book-to-market ratios. This suggests that overconfident CEOs tend to overvalue their own shares when they have been performing poorly and that the market does not believe the signal. On the other hand, underconfident CEOs tend to announce when they are more certain about the undervaluation of their own stock and the market rectifies its price with time. Finally, consistently with overconfident managers overpricing the stock of their firms, we find that the intended buyback fraction at announcement is larger for overconfident CEOs than for underconfident CEOs.

We challenge our results by using two other measures for overconfidence. We first use an options-based measure for managerial overconfidence. Namely, we use a longholder measure based on the CEOs’ option exercise behavior (Malmendier and Tate, 2008;

Malmendier, Tate, and Yan, 2011). Then, we also divide the announcing firms according to the gender of the executive team, and the gender of the CEOs and CFOs, since males have been found to exhibit a more overconfident behavior than females (Barber and Odean, 2001;

Niederle and Vesterlund, 2007; Dahlbom et al., 2010). We find that the post-announcement CARs are significantly higher for underconfident managers regardless of the measure of overconfidence we use.

This paper, therefore, provides strong empirical evidence about the overreaction hypothesis driving the buyback anomaly. Moreover, we show that overconfident managers tend to overprice the stock of their firms and engage in repurchase activities that are not in the best benefit of the firm.

We also find, differently from Chen and Wang (2012), that the post-buyback performance when the announcing firms are financially constrained is higher, not lower. This is to be expected if managers require larger underpricing due to the higher cost of capital.

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Table 1. Descriptive Statistics for Announcing Firms

This table reports descriptive statistics of the sample of firms that announced stock repurchases from 1992 to 2009. Panel A reports descriptive statistics for all the firms that announced a stock repurchase in the period 1992-2009. Panels B and C report descriptive statistics for announcing firms with overconfident and underconfident CEOs respectively. Overconfidence and underconfidence are determined following the Hirshleifer, Low, and Teoh (2012) confidence indicator. Fraction sought is the initially announced repurchase ratio authorized by the board of directors. Prior 6-month return is the cumulative return of the company in the previous 6 months to the repurchase announcement. WW is the Whited and Wu (2006) index of financial constraints. Size is the market value of common equity. SA is the Hadlock and Pierce (2010) index of financial constraints. KZ is the Kaplan and Zingales (1997) index of financial constraints. BM is the ratio of the book value of equity to the market value of equity. Actual Repurchases is the total number of announcements that were actually repurchased. Actual to Announced is given by the ratio of Actual Repurchases to Total Announcements.

WW, Size, SA, KZ, and BM have been winsorized at the 1% level.

Panel A: Total Announcements

Calendar Number of Fraction Prior 6-month Average Average Average Average Average Actual Actual

year Events Sought Returns WW Size SA KZ BM Repurchases to Announced

1992 594 8.35 -2.40% -0.27 1,555.98 -1,117.65 0.32 0.65 157 26.43%

1993 598 7.82 4.33% -0.29 1,761.81 -1,159.99 0.22 0.62 181 30.27%

1994 1,000 7.45 -2.93% -0.28 1,569.00 -1,191.43 0.30 0.72 249 24.90%

1995 1,087 7.16 4.85% -0.29 2,093.87 -1,154.13 0.37 0.66 291 26.77%

1996 1,398 7.36 -0.08% -0.30 2,599.25 -1,046.32 0.43 0.62 309 22.10%

1997 1,210 8.34 7.93% -0.29 3,051.34 -1,011.91 0.56 0.50 209 17.27%

1998 1,855 8.32 -10.36% -0.29 2,079.45 -866.58 0.63 0.67 228 12.29%

1999 1,474 8.60 -2.92% -0.28 1,680.23 -1,037.18 0.67 0.84 177 12.01%

2000 795 9.01 -7.59% -0.31 3,611.51 -1,231.15 0.61 0.88 198 24.91%

2001 640 8.57 -1.80% -0.28 3,754.87 -1,116.99 0.63 0.66 90 14.06%

2002 476 10.38 -4.24% -0.29 3,676.31 -1,162.84 0.48 0.73 69 14.50%

2003 490 9.63 12.16% -0.31 4,031.08 -1,232.42 0.58 0.48 68 13.88%

2004 584 8.57 5.74% -0.35 5,508.73 -1,342.44 0.48 0.43 81 13.87%

2005 652 8.89 4.18% -0.36 5,721.51 -1,557.10 0.57 0.49 68 10.43%

2006 624 8.79 1.75% -0.35 6,700.86 -1,504.04 0.47 0.46 53 8.49%

2007 985 9.02 -1.87% -0.36 5,612.21 -1,483.76 0.48 0.61 89 9.04%

2008 1,110 9.70 -16.86% -0.32 2,526.03 -1,150.12 0.30 1.03 78 7.03%

2009 453 10.16 -1.03% -0.33 3,715.59 -1,209.59 0.39 0.71 33 7.28%

All 16,025 8.35 -1.68% -0.31 3,090.87 -1,153.78 0.48 0.67 2,628 16.40%

Panel B: Announcements by Overconfident CEOs Calendar Number of Fraction Prior 6-month

Average Average Average Average Average Actual Actual

year Events Sought Returns WW Size SA KZ BM Repurchases to Announced

1992 23 6.17 3.60% -0.41 11,622 -2,556 -0.35 0.37 8 34.78%

1993 34 5.00 0.85% -0.44 8,629 -2,627 -0.14 0.43 9 26.47%

1994 54 6.25 -0.73% -0.44 10,106 -2,558 0.12 0.52 16 29.63%

1995 60 6.15 7.74% -0.42 13,533 -2,775 0.29 0.44 24 40.00%

1996 77 6.75 4.84% -0.46 17,052 -2,778 0.49 0.44 17 22.08%

1997 81 6.85 13.70% -0.45 17,423 -2,725 0.44 0.36 11 13.58%

1998 95 9.52 -1.19% -0.43 14,469 -2,380 0.64 0.39 14 14.74%

1999 75 7.02 2.44% -0.40 11,589 -2,338 0.99 0.40 9 12.00%

2000 99 7.83 -8.45% -0.43 16,470 -2,628 0.67 0.52 22 22.22%

2001 56 7.93 -6.10% -0.41 17,449 -2,370 0.75 0.43 7 12.50%

2002 47 8.71 -14.87% -0.43 19,095 -2,641 0.52 0.45 9 19.15%

2003 45 9.35 10.75% -0.43 21,727 -2,666 0.47 0.34 6 13.33%

2004 72 14.72 3.99% -0.45 21,058 -2,452 0.44 0.36 6 8.33%

2005 82 9.67 4.77% -0.46 18,493 -2,617 0.57 0.40 5 6.10%

2006 91 9.32 1.59% -0.46 21,617 -2,719 0.36 0.35 7 7.69%

2007 96 8.98 4.74% -0.47 22,001 -2,673 0.59 0.47 8 8.33%

2008 74 14.52 -9.66% -0.44 11,330 -2,682 0.40 0.67 0 0.00%

2009 33 11.57 21.79% -0.44 15,093 -2,407 0.36 0.42 0 0.00%

All 1,194 8.11 1.86% -0.44 16,556 -2,595 0.49 0.43 178 14.91%

Panel C: Announcements by Underconfident CEOs

Calendar Number of Fraction Prior 6-month Average Average Average Average Average Actual Actual

year Events Sought Returns WW Size SA KZ BM Repurchases to Announced

1992 13 3.31 11.58% -0.45 9,554 -2,784 0.36 0.41 5 38.46%

1993 40 4.58 11.43% -0.40 7,079 -2,081 0.12 0.40 10 25.00%

1994 66 5.52 3.09% -0.39 5,514 -2,137 -0.07 0.47 14 21.21%

1995 66 5.46 8.29% -0.38 7,392 -2,096 0.32 0.43 18 27.27%

1996 75 6.84 6.35% -0.42 10,927 -2,263 0.23 0.34 13 17.33%

1997 88 7.57 17.62% -0.40 9,995 -2,067 0.36 0.30 15 17.05%

1998 99 7.00 -1.93% -0.39 7,540 -1,936 0.65 0.35 11 11.11%

1999 70 7.15 7.52% -0.37 7,757 -1,845 0.57 0.44 5 7.14%

2000 53 8.57 -1.14% -0.41 12,467 -2,083 0.46 0.44 12 22.64%

2001 34 10.32 -6.54% -0.43 14,872 -2,333 0.67 0.37 5 14.71%

2002 21 6.41 1.77% -0.41 11,907 -2,294 0.24 0.44 2 9.52%

2003 19 6.50 21.21% -0.41 10,419 -2,213 0.66 0.38 0 0.00%

2004 33 7.83 8.02% -0.44 12,716 -2,491 0.21 0.38 6 18.18%

2005 45 14.39 4.18% -0.44 11,195 -2,527 0.52 0.43 3 6.67%

2006 37 5.87 0.23% -0.44 14,108 -2,443 0.28 0.45 4 10.81%

2007 72 10.64 1.50% -0.45 14,544 -2,488 0.32 0.49 3 4.17%

2008 48 12.53 -11.18% -0.46 13,828 -2,613 0.31 0.71 4 8.33%

2009 20 9.12 6.57% -0.48 21,682 -2,782 0.08 0.42 1 5.00%

All 899 7.12 4.63% -0.41 10,440 -2,220 0.37 0.42 131 14.57%

Table 2.Descriptive statistics for non-announcing firms

This table reports descriptive statistics of firms that did not announce a stock repurchase from 1992 to 2009.

WW is the Whited and Wu (2006) index of financial constraints. Size is the market value of common equity.

SA is the Hadlock and Pierce (2010) index of financial constraints. KZ index is the Kaplan and Zingales (1997) index of financial constraints. BM is the ratio of the book value of equity to the market value of equity. WW, Size, SA, KZ, and BM have been winsorized at the 1% level.

Calendar Number of Average Average Average Average Average

year firms WW size SA KZ BM

1992 1,071 -0.17 296 -749 1.08 0.48

1993 1,352 -0.20 304 -529 1.05 0.48

1994 1,235 -0.19 351 -448 0.90 0.56

1995 1,089 -0.19 537 -405 1.07 0.44

1996 1,454 -0.21 546 -349 0.86 0.43

1997 1,215 -0.23 857 -467 1.15 0.41

1998 952 -0.23 930 -602 1.14 0.60

1999 1,231 -0.21 2,335 -563 1.30 0.43

2000 1,100 -0.22 2,017 -559 0.91 0.76

2001 514 -0.26 3,218 -977 0.88 0.69

2002 490 -0.26 2,086 -1,063 0.85 0.70

2003 445 -0.29 2,356 -1,224 0.40 0.46

2004 576 -0.27 2,024 -862 0.62 0.42

2005 572 -0.29 1,821 - 891 0.72 0.42

2006 557 -0.33 2,798 -852 0.50 0.41

2007 580 -0.28 1,423 -777 0.58 0.50

2008 269 -0.28 1,200 -712 0.54 1.13

2009 258 -0.26 1,513 -698 0.73 0.66

All years 14,960 -0.23 1,259 -624 0.95 0.52

Table 3. Long-run abnormal return after open repurchase announcements divided by CEO confidence

Full sample Overconfident CEO Underconfident CEO Difference Months CAR t-statistic CAR t-statistic CAR t-statistic z-test

Panel A: 4 Factors

(+1.+12) 5.69% 13.27*** 5.77% 4.85*** 6.26% 4.96*** -0.28 (+1,+24) 12.69% 19.83*** 13.17% 7.49*** 13.50% 6.88*** -0.12 (+1,+36) 19.46% 23.39*** 16.48% 7.49*** 21.67% 8.44*** -1.54+

(+1,+48) 25.12% 24.92*** 17.39% 6.55*** 27.80% 8.88*** -2.53**+++

Obs 14,027 1,090 821

Table 4. Long-run abnormal returns by age, dividend payment status, and CEO confidence

This table reports cumulative average abnormal returns (CAR) in percent using Ibbotson's (1975) returns across time and security (IRATS) method combined with the Fama-French (1993) three-factor model, with momentum as an additional factor, for the firms that announced and open repurchase. In Panel A, firms are divided into two groups depending on their age, measured by the number of months the firms had appeared at CRSP previous the repurchase announcement. 242 months is the 90 percentile conditional on having confidence information. 71 months is the 10 percentile conditional on having confidence information. Then, each subsample is divided into 2 groups according to whether the CEOs are classified as overconfident or underconfident following the Hirshleifer, Low, and Teoh (2012) overconfidence indicator. Panel B divides firms into two groups depending on whether they paid dividends in the previous year to the repurchase announcement or not. Each subgroup is further divided by CEO confidence. Difference z-test is the one-tailed z-test for the difference between overconfident CEO and underconfident CEO estimates. The sample period is 1992 to 2009. ***, **, and * represent 1%, 5% and 10% significance level respectively. For the difference z-test, * indicates significance in a two-tail test, and + significance in a one-tail test.

Panel A: Long-run abnormal returns by age and CEO confidence

Old Firms≥242 months Young Firms ≤ 71 months

Overconfident CEO Underconfident CEO Difference Overconfident CEO Underconfident CEO Difference Months CAR t-statistic CAR t-statistic z-test CAR t-statistic CAR t-statistic z-test

(+1.+12) 0.69% 0.31 0.91% 0.38 -0.06 8.72% 1.96** 13.34% 2.92*** -0.73

(+1,+24) 2.90% 0.94 4.30% 1.11 -0.28 20.12% 3.07*** 28.42% 3.95*** -0.85

(+1,+36) -0.92% -0.25 8.53% 1.60* -1.45+ 22.34% 2.71*** 38.44% 3.83*** -1.24

(+1,+48) -4.12% -0.94 14.32% 2.11** -0.28**++ 19.33% 2.03** 45.25% 3.82*** -1.70*++

Obs 326 175 92 98

Panel B: Long-run abnormal returns by dividends and CEO confidence

Dividends No dividends

Overconfident CEO Underconfident CEO Difference Overconfident CEO Underconfident CEO Difference Months CAR t-statistic CAR t-statistic z-test CAR t-statistic CAR t-statistic z-test

(+1.+12) 2.37% 2.00** 2.68% 2.11** -0.74 15.63% 4.99*** 15.23% 4.50*** 0.08

(+1,+24) 7.89% 4.37*** 9.04% 4.60*** -0.43 28.64% 6.51*** 25.56% 4.80*** 0.45

(+1,+36) 8.69% 3.78*** 15.24% 5.90*** -1.89*++ 37.09% 6.96*** 40.30% 5.80*** -0.37 (+1,+48) 10.35% 3.64*** 18.83% 5.84*** -1.97**++ 36.82% 5.90*** 54.58% 6.69*** -1.73*++

Obs 788 613 278 186

Table 5. Long-run abnormal return by past performance, book-to-market, and CEO confidence

A firm is classified as having a high BM-ratio if, in the year before the announcement, it is above the 75 percentile of all the firms that announced repurchases. A firm is classified as a low BM if, in the previous year to an announcement, its BM is below the 25 percentile of all the firms that announced repurchases. BM is defined as the ratio of the market value of assets to the book value of assets where the market value of assets is calculated as the book value of assets minus the book value of common equity plus the market value of common equity. The variable was winsorized at the 1% level in each tail. Then, each subsample is divided into 2 groups according to whether the CEOs are classified as overconfident or underconfident following the Hirshleifer, Low, and Teoh (2012) overconfidence indicator. Difference z-test is the one-tailed z-test for the difference between the overconfident CEO and underconfident CEO estimates. The sample period is 1992 to 2009. ***, **, and * represent 1%, 5% and 10% significance level respectively. For the difference z-test, * indicates significance in a two-tail test, and + significance in a one-tail test.

Panel A: Long-run abnormal return by previous six-month performance and confidence

Poor Previous 6-month Performers Good Previous 6-month Performers

Overconfident CEO Underconfident CEO Difference Overconfident CEO Underconfident CEO Difference Months CAR t-statistic CAR t-statistic z-test CAR t-statistic CAR t-statistic z-test

(+1.+12) 9.12% 2.88*** 9.06% 2.86*** 0.01 6.64% 2.51*** 7.65% 2.85*** -0.27

(+1,+24) 21.74% 4.81*** 23.19% 4.49*** -0.21 11.83% 3.00*** 13.68% 3.42*** -0.33 (+1,+36) 27.99% 5.27*** 37.26% 5.58*** -1.09 13.86% 2.86*** 19.11% 3.75*** -0.75 (+1,+48) 22.70% 3.70*** 48.09% 6.20*** -2.57**+++ 20.63% 6.61*** 23.32% 3.74*** -0.32

Obs 282 180 240 215

Panel B: Long-run abnormal return by BM and CEO confidence

High BM Low BM

Overconfident CEO Underconfident CEO Difference Overconfident CEO Underconfident CEO Difference Months CAR t-statistic CAR t-statistic z-test CAR t-statistic CAR t-statistic z-test (+1.+12) 2.40% 0.83 4.73% -0.62 -0.62 10.64% 4.60*** 11.31% 3.98*** -0.18

(+1,+24) 8.77% 2.08** 15.53% -1.16 -1.15 18.97% 5.91*** 17.97% 4.27*** 0.19

(+1,+36) 10.21% 1.97** 24.82% -1.98** -1.98**++ 26.14% 6.48*** 26.60% 5.02*** -0.07

(+1,+48) 5.67% 0.90 28.04% -2.50** -2.50**+++ 28.50% 6.12*** 31.05% 4.79*** -0.32

Obs 256 202 283 186

Table 6. Long-run abnormal return by financial constraints, and CEO confidence

This table reports cumulative average abnormal returns (CAR) in percent using Ibbotson's (1975) returns across time and security (IRATS) method combined with the Fama-French (1993) three-factor model with momentum as an additional factor, for the firms that announced and open repurchase. Firms are divided into financially constrained and financially unconstrained. A firm is classified as constrained if it belonged to the top 25 percentile of the Whited and Wu (2006) index (Panel A), to the lowest 25 percentile according to size (Panel B), to the top 25 percentile of the size and age Hadlock and Pierce (2010) index (Panel C), or top 25 percentile in the Kaplan and Zingales (1997) index (Panel D) in the previous year to the announcement, and as unconstrained if it belonged to any other percentile for the Whited and Wu, the size and age Hadlock and Pierce, and the Kaplan and Zingales indexes, or if the firm belonged to the top 25 percentile in size. The indexes have been winsorized at the 1% level of their distributions to avoid the effects of extreme values. Size is defined as the market value of common equity in the previous year to the announcement. Then, each subsample is divided into 2 groups according to whether the CEOs are classified as overconfident or underconfident following the Hirshleifer, Low, and Teoh (2012) overconfidence indicator. Difference z-test is the one-tailed z-test for the difference between the overconfident CEO and underconfident CEO estimates. The sample period is 1992 to 2009. ***, **, and * represent 1%, 5% and 10% significance level respectively. For the difference z-test,

* indicates significance in a two-tail test, and + significance in a one-tail test.

Financially Constrained Financially Unconstrained

In document Managerial Overconfidence and the Buyback Anomaly (sider 21-39)