Do Managers Use Reference Points? Evidence from Stock Repurchases

Abstract

This study adds to a growing literature on managerial reference points by examining whether prior repurchase prices are reference points for current repurchase decisions. We find that the percent change from the prior repurchase price to the current stock price is negatively related to the current level of repurchases. This relationship is robust to controlling for the well-known negative relationship between prior stock returns and repurchases, and it is not explained by contemporaneous or future investments or cash flows. To facilitate a causal interpretation, we find that the relationship between prior repurchase prices and current repurchases disappears when the prior repurchase price is associated with a previous manager. These results are consistent with the idea that managers use past repurchase prices as reference points for current repurchase decisions.