Rational expectation, firm size, and sample selection bias

Many firms in the U.S. reduce their size by paying stockholders extra cash dividends, or what is more common, by repurchasing stock. Empirical evidence shows that the market's reaction to a stock repurchase is positive. In this paper we show that the positive market reaction to a stock repurchase stems from a sample selection bias. Under rational expectation and no selection bias, zero market reaction is anticipated.