Limited attention, share repurchases, and takeover risk

Ji-chai Lin, Clifford P. Stephens, Yi Lin Wu

Research output: Journal article publicationJournal articleAcademic researchpeer-review

16 Citations (Scopus)


We hypothesize that announcing open market share repurchases (OMRs) to counter negative valuation shocks reveals repurchasing firms' lost growth opportunities or underperforming assets to potential bidders, making them more likely to become takeover targets. This also leads their investors to face higher takeover risk, a systematic risk associated with economic fundamentals that drive takeover waves, as proposed by Cremers et al. (2009). Indeed, we find that repurchasing firms tend to face higher takeover probability in the first few years following their OMR announcements, and that the increase in takeover risk can largely explain their post-announcement long-run abnormal returns documented in the literature. The increase in takeover risk is larger for smaller firms, firms with poorer pre-announcement stock performance, and those attracting more attention of market participants. Our results suggest that OMRs, which are used by many firms to counter undervaluation, could make the firms more sensitive to takeover waves and raise their cost of equity capital.
Original languageEnglish
Pages (from-to)283-301
Number of pages19
JournalJournal of Banking and Finance
Issue number1
Publication statusPublished - 1 May 2014
Externally publishedYes


  • Limited attention
  • Long-run performance
  • Share buybacks
  • Takeover risk

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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