Ilona Babenko

The Credibility of Open Market Share Repurchase Signaling

Open market share repurchase announcements are commonly associated with equity undervaluation, but their signal about firm value can often be misleading. We conjecture that executives who buy shares of their firm before an announcement add credibility to the undervaluation signal. Consistent with this hypothesis, we find that announcement returns are positively related to past insider purchases, especially for firms that are priced less efficiently. Firms whose insiders bought more shares are also more likely to complete their repurchase plans. Finally, we find that insider purchases predict post-announcement stock returns.

Do Non-Executive Employees Have Information? Evidence from Employee Stock Purchase Plans

Using novel data on employee stock purchase plans (ESPPs), we show that aggregate purchases of company stock by lower-level employees predict future stock returns. Firms in the top quartile of ESPP purchases outperform those in the bottom quartile by 10% in the year after purchase. The relation between ESPP purchases and future stock returns is stronger for firms with high information asymmetry. Further, we find that high ESPP purchases are associated with a lower likelihood of earnings restatements and breaks in strings of consecutive earnings increases, as well as higher future sales growth and more innovation. We argue that these findings support the hypothesis that lower-level employees have information about future firm performance, and we examine and reject a number of alternative explanations. Our results have implications for firms using employees as a source of capital, accounting issues related to expensing of equity-based compensation, and disclosure policy.

Market Timing with Cay

Market timing strategies using deviations from the long-run log consumption-wealth ratio (Cay) are tested to evaluate whether such strategies deliver superior investment performance. Several statistical tests indicate that true Cay embeds economically significant information about future market returns. At the same time, constraints such as the need to use the estimated rather than true ratio and delays in availability of macroeconomic data cast doubt on the likelihood that the market can be timed using mechanistic strategies based on Cay. Further research will ascertain whether it is possible to implement successful timing strategies using such a ratio.

Do Nonexecutive Employees Have Valuable Information? Evidence from Employee Stock Purchase Plans

Using novel data on employee stock purchase plans (ESPPs), we show that aggregate purchases of company stock by lower-level employees predict future stock returns. Firms in the top quartile of ESPP purchases outperform those in the bottom quartile by 10% in the year after purchase. The relation between ESPP purchases and future stock returns is stronger for firms with high information asymmetry. Furthermore, we find that high ESPP purchases are associated with a lower likelihood of breaks in strings of consecutive earnings increases, as well as higher future sales growth and more innovation. These findings support the hypothesis that lower-level employees have information about future firm performance. We examine and reject a number of alternative explanations. Our results have implications for firms using employees as a source of capital, accounting issues related to expensing of equity-based compensation, and disclosure policy.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2226 . This paper was accepted by Wei Jiang, finance .

Is Market Timing Good for Shareholders

We challenge the view that equity market timing always benets shareholders. By distinguishing the eect of a rm’s equity decisions from the eect of mispricing itself, we show that market timing can decrease shareholder value. Additionally, the timing of equity sales has a more negative eect on existing shareholders than the timing of share repurchases. Our theory can be used to infer rms’ maximization objectives from their observed market timing strategies. We argue that the popularity of stock buybacks and the low frequency of seasoned equity oerings

Why Firms Issue Stock to Their Own Employees

This paper shows that issuing shares to firm employees instead of outside investors mitigates the adverse selection problem and lowers cost of capital. For a firm that repeatedly needs funds, the incentives to grant overvalued equity to employees are reduced because employees can rationally deprive the firm of fairly-priced financing after a poor stock price performance. The model explains stylized facts, such as a positive relation between risk and incentives, improvements in operating performance after stock-based grants, and systematic overvaluation by employees of their equity-based compensation. Additionally, it shows that combining outside equity financing with stock-based grants to employees allows the firm to signal value and to price new equity issues more favorably. Empirical evidence provides support to the main predictions of the model.