This paper examines stock price behavior surrounding announcements of stock repurchases made by Japanese firms from 1995 to 1998. Our analysis shows that, much as in the case of the U.S. markets, stock prices in Japan go up in response to stock repurchase announcements. We also find that there is no significant difference between the market reaction to the announcement for intention of repurchase execution and the market reaction to the announcement of an article alteration to allow stock repurchases. On the other hand, there is a significant difference in the pre-announcement period returns motivating these two announcements. While a large decline in stock price will motivate a firm to execute a stock repurchase, a smaller price decline will motivate a firm to merely alter its articles of association to allow future repurchases.

This paper discusses the superiority of convertible debt to common debt and equity in controlling managerial opportunism. When managers have both empire‐building tendencies and fears of default, over‐investment occurs under low debt levels and under‐investment occurs under high debt levels. Convertible debt, which can adjust firms' debt levels by its convertibility, can restrict over‐investment and help firms to avoid under‐investment at the same time. In a simple setting, we show that well‐designed callable convertible debt has an important role in controlling managerial opportunistic behavior that neither common debt nor equity has.

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This paper provides a simple explanation of open-market stock repurchases and the stock price behavior surrounding them. There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open-market repurchase announcements reveal information about the managers' private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open-market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open-market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts.Keywords: open-market stock repurchases, asymmetric information, agency problem, stock price behavior JEL Classifications: G3 UG35

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Wiley and Financial Management Association International are collaborating with JSTOR to digitize, preserve and extend access to Financial Management. I ask why a firm would choose to buy back its outstanding shares after the stock price goes up in response to an open-market repurchase announcement. I introduce the subject of market inefficiency and establish a signaling equilibrium that does not assume that an announcement of open-market repurchase represents a commitment. Since the firm can earn capital gains by buying its outstanding shares at a bargain price, it has a strong incentive to execute stock repurchases even after it announces repurchase intention. Empirically, my model predicts positive long-run stock return performance and positive announcement effects following open-market repurchase announcements. (2000) report that open-market stock repurchasing has been the most popular method for firms to repurchase stock. Many empirical studies report that stock prices go up in response to open-market repurchase announcements.' That is, open-market repurchase announcements are good news for the stock market. This is known as the signaling hypothesis for open-market stock repurchases. Stock repurchases have become an important financial policy for listing firms over the last 20 years. Bagwell and Shoven (1989) and Grullon and MichaelyIn addition to the positive announcement effect, Ikenberry, Lakonishok, and Vermaelen (1995) find that stock prices further appreciate following announcements of open-market repurchases. They report that, on average, announcing firms experience a significant positive stock price increase of about 12% over the subsequent four years. This phenomenon suggests that, for an announcing firm, purchase of its outstanding shares constitutes a profitable investment opportunity even after the stock price rises in response to the announcement of an open-market repurchase. In fact, although firms do not necessarily need to obey their announcements, Stephens and Weisbach (1998) report that most firms do follow through with such announcements.As pointed out by Ikenberry et al. (1995), if the market evaluates the worth of the stock price of a firm based on the fundamentals, then repurchase of outstanding shares will not be profitable immediately following the market reaction to the announcement. Thus, in an efficient market, it is difficult to explain by the signaling hypothesis why a firm would actually buy back its outstanding shares after announcing its intention to repurchase shares. In this paper, I reexamine corporate open-market stock repurchase strategy and stock price behavior when there exists both informational asymmetry and market inefficiency.I int...