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Some companies announce a share repurchase program and yet never end up repurchasing their shares. The theoretical model predicts that companies that are significantly undervalued announce share repurchase programs but never follow through, whereas companies that are trading closer to their intrinsic value do repurchase their shares.
The authors develop a model to understand why some companies that announce a share repurchase program follow through and repurchase shares and some do not. They find that companies that are significantly undervalued do not have to repurchase shares for the market to bring their share price more in line with their fundamental value. Firms whose market value is not significantly undervalued, however, do have to repurchase shares in the open market to help drive the share price up. This article is a considerable revision to Bhattacharya and Dittmar (working paper 2001) and has close links with two other papers: Oded (Review of Financial Studies 2005) and Allen, Bernardo, and Welch (Journal of Finance 2000). Click here to read the entire abstract article published by the CFA Digest. - Paul R. Rossi, CFA
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