Idiosyncratic risk and share repurchases

- A potential risk-based explanation for the repurchase anomaly.
- The post-repurchase outperformance reflects high idiosyncratic risk exposure.
- The idiosyncratic risk factor captures the movement of the stock return.

The 'open market share repurchase anomaly' occurs when stocks of repurchasing firms subsequently outperform non-repurchasing firms matched on several firm characteristics. We document that the post-repurchase outperformance reflects higher idiosyncratic risk exposure for repurchasing firms than matching firms. A possible explanation is that, as firms' leverage increases due to share repurchases, their exposure to idiosyncratic risk rises, thus increasing their stocks' expected returns relative to matched firms.