Why Do REITs Repurchase Stock? Extricating the Effect of Managerial Signaling in Open Market Share Repurchase Announcements

This paper explores the effect of stock repurchase announcements on equity returns for publicly traded real estate investment trusts (REITs). In addition to providing analysis of the corporate decision to repurchase shares, the study of share repurchases in the context of REITs provides a novel opportunity to disentangle the impact of competing theories for the abnormal returns observed around repurchase announcements. Prior literature advances six hypotheses to explain the stock price reaction associated with repurchases. Given that the theories all predict the same stock price reaction, existing studies are unable to disentangle the competing hypotheses. The intent of this research is to extricate the signaling hypothesis from the competing explanations to determine whether the managerial signaling hypothesis is a credible explanation for the abnormal returns observed around share repurchase announcements. After controlling for relevant economic variables, we provide evidence for the efficacy of the managerial signaling hypothesis.