Abstract
This paper studies buybacks in a setting with two informed parties: a manager implementing buybacks and an outside speculator. Buybacks introduce two opposing economic forces. They intensify the competition for trading profits, making informed trading less profitable. They also make the per-share value of the firm higher (lower) when its shares are undervalued (overvalued); the increased dispersion makes informed trading more profitable. Less informative buybacks weaken the first effect while strengthening the second. Uninformed buybacks lower shareholder welfare. Managerial incentives to inflate the current stock price constrain the informative-ness of buybacks. The model generates novel predictions linking managerial compensation, buybacks, and trading outcomes.