Managerial Ability and Corporate Repurchase Activity

We examine how managerial ability is associated with stock repurchase activity. Adopting the managerial efficiency score developed by Demerjian, Lev, and McVay (2012) as the proxy for managerial ability, we explore the link between managerial ability and stock repurchase based on a total number of 85,480 firm-year observations in the U.S. from 1980 to 2016. We find that firms with higher managerial ability are more likely to conduct share repurchases and spend more on repurchasing shares. Our findings are robust to using alternative measure of managerial ability, controlling for unobservable variables and the impact of dividend tax cut of 2003, and addressing potential endogeneity concerns. In addition, talented managers tend to repurchase shares instead of issuing more dividends. Firms with high-ability managers reduce overinvestment in favor of repurchases. This study contributes to the literature of managerial traits on corporate decisions.