International Journal of Econometrics and Financial Management
ISSN (Print): 2374-2011 ISSN (Online): 2374-2038 Website: Editor-in-chief: Tarek Sadraoui
Open Access
Journal Browser
International Journal of Econometrics and Financial Management. 2014, 2(3), 102-113
DOI: 10.12691/ijefm-2-3-3
Open AccessArticle

The Impact of Investor Heterogeneity in Beliefs on Share Repurchase

Hao Wang1 and Xiaochun Liu2,

1Model Development Department, Regions Bank, Birmingham AL, USA

2Department of Economics, Emory University, Atlanta GA, USA

Pub. Date: August 20, 2014

Cite this paper:
Hao Wang and Xiaochun Liu. The Impact of Investor Heterogeneity in Beliefs on Share Repurchase. International Journal of Econometrics and Financial Management. 2014; 2(3):102-113. doi: 10.12691/ijefm-2-3-3


In this paper, we propose a new share repurchasing model to show the impact of the heterogeneity of investor beliefs on share repurchase. We first provide a comprehensive survey on the literature of share repurchases which has not been considered by previous studies, to the best of our knowledge. We review both the theoretical model structures and the major empirical results including various measures of divergence of opinion developed in the literature. Our new repurchasing model uses actual share repurchases to show that investors’ divergence of opinion on the firm value matters in a manager’s share repurchase decision. The long-term stock price performance is consistent with our model predictions.

actual share repurchases heteroscedastic expectations asset pricing divergence of opinion

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit


[1]  Abarbanell, J.S., Lanen, W.N., Verrecchia, R.E., 1995. Analysts' forecasts as proxies for investor beliefs in empirical research. Journal of Accounting and Economics 20, 31-60.
[2]  Ajinkya, B., Atiase, R., Dontoh, A., Gift, M., 2004. Heterogeneous Prior Beliefs, Differential Interpretation and the Consensus Effect of Quarterly Earnings Signals and Trading Volume. Working paper, University of Texas at Austin.
[3]  Ajinkya, B.B., Atiase, R.K., Gift, M.J., 1991. Volume of trading and the dispersion in financial analysts' earnings forecasts. The Accounting Review 66, 389-401.
[4]  Alexandridis, G., Antoniou, A., Petmezas, D., 2007. Divergence of opinion and post-acquisition performance. Journal of Business Finance and Accounting 34, 439.
[5]  Amihud, Y., Mendelson, H., 1980. Dealership market: Market-making with inventory. Journal of financial economics 8, 31-53.
[6]  Anderson, E.W., Ghysels, E., Juergens, J.L., 2005. Do heterogeneous beliefs matter for asset pricing? Review of Financial Studies 18, 875.
[7]  Bagwell, L.S., 1991a. Share Repurchase and Takeover Deterrence. The RAND Journal of Economics 22, 72-88.
[8]  Bagwell, L.S., 1991b. Shareholder Heterogeneity: Evidence and Implications. The American Economic Review 81, 218-221.
[9]  Bagwell, L.S., 1992. Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity. The Journal of Finance 47, 71-105.
[10]  Bamber, L.S., 1987. Unexpected earnings, firm size, and trading volume around quarterly earnings announcements. The Accounting Review 62, 510-532.
[11]  Barron, O.E., Stanford, M.H., Yu, Y., 2009. Further Evidence on the Relation between Analysts' Forecast Dispersion and Stock Returns*. Contemporary Accounting Research 26, 329-357.
[12]  Blau, B., Fuller, K., Walker, M.M., Wang, H., 2011. Divergence of Opinion and Actual Share Repurchase. Working paper.
[13]  Boehme, R., Danielsen, B., Sorescu, S., 2006. Short-sale constraints, differences of opinion, and overvaluation. The Journal of Financial and Quantitative Analysis 41, 455-487.
[14]  Brockman, P., Chung, D., 2001. Managerial Timing and Corporate Liquidity: Evidence from Actual Share Repurchases. Journal of Financial Economics 61, 417-448.
[15]  Browning, M., Hansen, L.P., Heckman, J.J., 1999. Micro data and general equilibrium models. Handbook of macroeconomics 1, 543-633.
[16]  Chemmanur, T., Krishnan, K., Nandy, D., 2009. How does venture capital financing improve efficiency in private firms? A look beneath the surface. Unpublished working paper, Center for Economic Studies.
[17]  Chen, H., Singal, V., 2003. Role of speculative short sales in price formation: The case of the weekend effect. The Journal of Finance, 685-705.
[18]  Conlon, J., Fuller, K., Wang, H., 2011. Investor Heterogeneity, Actual Share Repurchase, and Long-term Return Anomaly. Working paper.
[19]  Constantinides, G.M., Duffie, D., 1996. Asset pricing with heterogeneous consumers. The Journal of Political Economy 104, 219-240.
[20]  Coval, J., Thakor, A., 2005. Financial intermediation as a beliefs-bridge between optimists and pessimists. Journal of financial economics 75, 535-569.
[21]  Curcuru, S., Heaton, J., Lucas, D., Moore, D., 2004. Heterogeneity and portfolio choice: Theory and evidence. Handbook of Financial Econometrics.
[22]  D’avolio, G., 2002. The market for borrowing stock. Journal of Financial Economics 66, 271-306.
[23]  Danielsen, B., Sorescu, S., 2009. Why do option introductions depress stock prices? A study of diminishing short sale constraints. The Journal of Financial and Quantitative Analysis 36, 451-484.
[24]  De Long, J.B., Shleifer, A., Summers, L.H., Waldmann, R.J., 1990. Noise Trader Risk in Financial Markets. The Journal of Political Economy 98, 703-738.
[25]  Diether, K.B., Malloy, C.J., Scherbina, A., 2002. Differences of Opinion and the Cross Section of Stock Returns. The Journal of Finance 57, 2113-2141.
[26]  Dittmar, A., Thakor, A., 2007. Why Do Firms Issue Equity? The Journal of Finance 62, 1-54.
[27]  Doukas, J., Kim, C., Pantzalis, C., 2006. Divergence of Opinion and Equity Returns. The Journal of Financial and Quantitative Analysis 41, 573.
[28]  Duffie, D., Garleanu, N., Pedersen, L., 2002. Securities lending, shorting, and pricing. Journal of Financial Economics 66, 307-339
[29]  Ekholm, A., 2006. How do different types of investors react to new earnings information? Journal of Business Finance & Accounting 33, 127-144.
[30]  Evans, R., Geczy, C., Musto, D., Reed, A., 2008. Failure is an option: Impediments to short selling and options prices. The Review of Financial Studies.
[31]  Fama, E., French, K., 2007. Disagreement, Tastes, and Asset Prices. Journal of Financial Economics 83, 667-689.
[32]  Figlewski, S., Webb, G., 1993. Options, short sales, and market completeness. The Journal of Finance, 761-777.
[33]  Flannery, M., Kwan, S., Nimalendran, M., 2004. Market evidence on the opaqueness of banking firms' assets. Journal of Financial Economics 71, 419-460.
[34]  Fleming, M.J., Remolona, E.M., 1999. Price formation and liquidity in the US Treasury market: The response to public information. The Journal of Finance 54, 1901-1915.
[35]  Fried, J.M., 2001. Open market repurchases: signaling or managerial opportunism? Theoretical inquiries in Law 2, 11.
[36]  Garfinkel, J., 2009. Measuring investors' opinion divergence. Journal of Accounting Research 47, 1317-1348.
[37]  Garfinkel, J., Sokobin, J., 2006. Volume, Opinion Divergence, and Returns: A Study of Post–Earnings Announcement Drift. Journal of Accounting Research 44, 85-112.
[38]  Geczy, C., Musto, D., Reed, A., 2002. Stocks are special too: An analysis of the equity lending market. Journal of Financial Economics 66, 241-269.
[39]  Gorman, W.M., 1953. Community preference fields. Econometrica: Journal of the Econometric Society, 63-80
[40]  Grundy, B.D., McNichols, M., 1989. Trade and the revelation of information through prices and direct disclosure. Review of Financial Studies 2, 495.
[41]  Handa, P., Schwartz, R., Tiwari, A., 2003. Quote setting and price formation in an order driven market. Journal of Financial Markets 6, 461-489.
[42]  Harris, M., Raviv, A., 1993. Differences of Opinion Make a Horse Race. The Review of Financial Studies 6, 473-506.
[43]  Harrison, J.M., Kreps, D.M., 1978. Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations. The Quarterly Journal of Economics 92, 323-336.
[44]  Haruvy, E., Noussair, C., 2006. The effect of short selling on bubbles and crashes in experimental spot asset markets. The Journal of Finance 61, 1119-1157.
[45]  Heaton, J., Lucas, D.J., 1996. Evaluating the effects of incomplete markets on risk sharing and asset pricing. The Journal of Political Economy 104, 443-487.
[46]  Ho, T.S.Y., Stoll, H.R., 1983. The dynamics of dealer markets under competition. Journal of Finance, 1053-1074.
[47]  Hong, H., Stein, J., 2003. Differences of opinion, short-sales constraints, and market crashes. The Review of Financial Studies 16, 487-525.
[48]  Hong, H., Stein, J., 2007. Disagreement and the Stock Market. The Journal of Economic Perspectives 21, 109-128.
[49]  Houge, T., Loughran, T., Suchanek, G., Yan, X., 2001. Divergence of opinion, uncertainty, and the quality of initial public offerings. Financial Management 30, 5-23.
[50]  Huang, S., Thakor, A., 2010. Investor Heterogeneity, Investor-Management Agreement and Open-Market Share Repurchases. working paper.
[51]  Jarrow, R., 1980. Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices. The Journal of Finance 35, 1105-1113.
[52]  Jones, C., Lamont, O., 2002. Short-sale constraints and stock returns. Journal of Financial Economics 66, 207-239
[53]  Kandel, E., Pearson, N.D., 1995. Differential Interpretation of Public Signals and Trade in Speculative Markets. The Journal of Political Economy 103, 831-872
[54]  Karpoff, J.M., 1986. A theory of trading volume. The Journal of Finance 41, 1069-1087.
[55]  Keynes, J.M., 1937. The General Theory of Employment. The Quarterly Journal of Economics 51, 209-223.
[56]  Kim, O., Verrecchia, R.E., 1991. Trading volume and price reactions to public announcements. Journal of Accounting Research 29, 302-321.
[57]  Lerman, A., Livnat, J., Mendenhall, R.R., 2007. The high-volume return premium and post-earnings announcement drift.
[58]  Lintner, J., 1965. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics 47, 13-37.
[59]  Lintner, J., 1969. The aggregation of investor's diverse judgments and preferences in purely competitive security markets. Journal of Financial and Quantitative Analysis 4, 347-400.
[60]  Margrabe, W., 1978. The value of an option to exchange one asset for another. The Journal of Finance 33, 177-186.
[61]  Mayshar, J., 1983. On Divergence of Opinion and Imperfections in Capital Markets. The American Economic Review 73, 114-128
[62]  Milgrom, P., Stokey, N., 1982. Information, trade and common knowledge. Journal of Economic Theory 26, 17-27.
[63]  Miller, E.M., 1977. Risk, Uncertainty, and Divergence of Opinion. The Journal of Finance 32, 1151-1168.
[64]  Morgan, D., 2002. Rating banks: Risk and uncertainty in an opaque industry. American Economic Review 92, 874-888.
[65]  Nagel, S., 2005. Short sales, institutional investors and the cross-section of stock returns. Journal of Financial Economics 78, 277-309.
[66]  Ofek, E., Richardson, M., Whitelaw, R., 2004. Limited arbitrage and short sales restrictions: Evidence from the options markets. Journal of Financial Economics 74, 305-342.
[67]  Persons, J., 1997. Heterogeneous shareholders and Signaling with Share Repurchases. Journal of Corporate Finance 3, 221-249
[68]  Sadka, R., Scherbina, A., 2007. Analyst Disagreement, Mispricing, and Liquidity. The Journal of Finance 62, 2367-2403.
[69]  Sharpe, W.F., 1964. Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance 19, 425-442.
[70]  Sharpe, W.F., Sharpe, W., 1970. Portfolio theory and capital markets. McGraw-Hill New York.
[71]  Shefrin, H., 2001. Behavioral corporate finance. Journal of Applied Corporate Finance 14, 113-126.
[72]  Shleifer, A., Vishny, R.W., 1997. The Limits of Arbitrage. Journal of Finance 52, 35-55.
[73]  Smith, V.L., Suchanek, G.L., Williams, A.W., 1988. Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica: Journal of the Econometric Society, 1119-1151.
[74]  Van den Steen, E., 2004. Rational overoptimism (and other biases). The American Economic Review 94, 1141-1151.
[75]  Varian, H., 1989. Differences of opinion in financial markets. pp. 3-37.
[76]  Varian, H.R., 1985. Divergence of Opinion in Complete Markets: A Note. The Journal of Finance 40, 309-317.
[77]  Williams, J., 1956. The Theory of Investment Value. North-Holland Publishing Co.: Amsterdam.
[78]  Zhang, X.F., 2006a. Information Uncertainty and Analyst Forecast Behavior*. Contemporary Accounting Research 23, 565-590.
[79]  Zhang, X.F., 2006b. Information uncertainty and stock returns. The Journal of Finance 61, 105-13.