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Optimal execution of open-market stock repurchase programs

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  • Oded, Jacob
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    Abstract

    This paper formalizes the following intuition about open-market share repurchases. Firms do open-market share repurchases to return free cash, which would otherwise be wasted. However, when the firm goes to buy its own shares with this cash, it has inside information and hence the actual execution is characterized by adverse selection. The market knows that the firm has inside information, and consequently the ask price is high to compensate for this adverse selection problem. This implies that, all else equal, the greater the adverse selection problem compared to the cash waste problem, the higher the ask price, and, therefore, the wider the bid-ask spread and the lower the share repurchase completion rate. We test this implication on a sample of U.S. firms and report evidence consistent with the model.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 12 (2009)
    Issue (Month): 4 (November)
    Pages: 832-869

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    Handle: RePEc:eee:finmar:v:12:y:2009:i:4:p:832-869

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    Web page: http://www.elsevier.com/locate/finmar

    Related research

    Keywords: Payout policy Stock repurchases Buybacks Bid-ask spread Liquidity;

    References

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    Cited by:
    1. Oded, Jacob, 2011. "Stock repurchases: How firms choose between a self tender offer and an open-market program," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3174-3187.
    2. Ben-Rephael, Azi & Oded, Jacob & Wohl, Avi, 2011. "Do firms buy their stock at bargain prices? Evidence from actual stock repurchase disclosure," CFS Working Paper Series 2011/17, Center for Financial Studies (CFS).

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