Noisy Signaling through Open Market Share Repurchase Programs and Information Production by Institutions

We propose a “noisy signaling" hypothesis of open market share repurchase (OMSR) programs, where the equity market equilibrium that prevails after OMSR program announcements is a partial pooling rather than a fully separating equilibrium. We argue that two complementary mechanisms, namely, actual share repurchases by firms and information production by institutions, serve to reduce the residual equity market information asymmetry facing firms subsequent to OMSR program announcements. We test the implications of our noisy signaling hypothesis using transaction-level data on trading by institutions and by a subsample of identified hedge funds, and find strong support for the above hypothesis