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The first essay examines how the outcome of prior repurchasing activity influences future repurchasing decisions. We find strong evidence that future decisions to repurchase equity are negatively influenced by poorly timed past repurchases. Specifically, we show that the past losses on stock repurchases reduce the propensity to engage in additional repurchases in the future. We find almost no evidence that past gains on repurchases positively or negatively influence future repurchasing activity. These results are robust to various firm characteristics, estimation and sampling methods. Further analyses show that losses on past repurchases influence dividend policy. We show that the dividend-repurchase substitution rate slows down for firms that experience losses in their past repurchase activities. Overall, results suggest that managerial behavioral biases have a strong influence on future repurchase decisions consistent with the loss-aversion concept of prospect theory.
The second essay examines the relation between insider (officers and directors) open market transactions and the outcome of past insider trading to better understand what motivates insiders to trade. We find strong evidence that open market purchases made by insiders are negatively influenced by poorly timed insider purchases. Specifically, we show that the losses on insider purchases reduce the intensity of open market purchases. We find almost no evidence that past gains from insider trading positively or negatively influence open market purchases. These results are robust to various firm characteristics, estimation and sampling methods. The results suggest that managerial behavioral biases have a strong influence on future insider purchasing activity consistent with the loss-aversion concept of prospect theory. Further analyses show that loss aversion can enhance insider wealth by helping insiders avoid a loss of 5.7% over the course of the next year under certain circumstances while refraining from loss aversion under certain circumstances can help insiders to net an average of 8.14% over the following year.
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