Tests of Hypothesis Sample Clauses

Tests of Hypothesis. 1 Hypothesis 1: The lower the investor-management agreement parameter, the more likely is the firm to undertake a repurchase.

Tests of Hypothesis. 2 Hypothesis 2: The post-repurchase investor-management agreement improves. Our theory predicts that the post-repurchase improvement in agreement decreases in the pre-repurchase agreement level after controlling for the amount of money spent in the repurchase. Yet, a direct examination of this prediction encounters some empirical difficulties. First, although it is intuitive to use the agreement proxies to measure the pre-repurchase agreement level, using the same variables to proxy for the post-repurchase agreement is subject to some interpretation problem. To illustrate, take the example of the analysts’ forecast dispersion proxy. The theory predicts that disagreeing investors will tender their shares in an open market repurchase, and thus the investor-management agreement improves after the repurchase. And yet those similarly disagreeing analysts may continue their coverage of the firm anyway regardless of whether the firm conducts a repurchase. Therefore, although the analyst-management agreement closely mimics the investor-management agreement prior to a repurchase, it might not be the case afterwards. Additionally, there is also a potential concern involved in pursuing a direct test of the post-repurchase improvement in agreement by regressing the change in agreement level on the pre-repurchase agreement level. Namely, there might be a mechanical relation between the dependent “change in agreement” variables and their initial values, even though it is theoretically plausible that a negative relationship does exist (indeed, our theory predicts that). Therefore, instead of conducting a direct test of Hypothesis 2 using our agreement proxies, we investigate, without loss of flavor, a prediction of this hypothesis. Specifically, we examine how investors’ reaction to managerial decisions changes after a firm undertakes a repurchase. Our theoretical argument predicts that, due to the enhanced agreement between investors and management after a repurchase, investors are more likely to endorse managerial decisions after a repurchase than before. The empirical difficulty in testing this prediction is that most management decisions are either not observable or are not readily identifiable. One corporate event that allows us to circumvent this difficulty is acquisitions made by repurchasing firms. The public announcement of an acquisition is accompanied by details of the deal, so the price reaction to the announcement reflects the extent to which investors endor...