Optimal execution of open-market stock repurchase programs
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Allen, Franklin & Michaely, Roni, 2003.
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429
- Alon Brav & John R. Graham & Campbell R. Harvey & Roni Michaely, 2003.
"Payout Policy in the 21st Century,"
NBER Working Papers
9657, National Bureau of Economic Research, Inc.
- David L. Ikenberry & Theo Vermaelen, 1996. "The Option to Repurchase Stock," Financial Management, Financial Management Association, vol. 25(4), Winter.
- P. Raghavendra Rau & Theo Vermaelen, 2002. "Regulation, Taxes, and Share Repurchases in the United Kingdom," The Journal of Business, University of Chicago Press, vol. 75(2), pages 245-282, April.
- Lawrence R. Glosten & Paul R. Milgrom, 1983.
"Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders,"
570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
- Thomas H. Noe, 2001.
"Investor Activism and Financial Market Structure,"
CeRP Working Papers
14, Center for Research on Pensions and Welfare Policies, Turin (Italy).
- Hans R. Stoll, .
"The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks,"
Rodney L. White Center for Financial Research Working Papers
13-77, Wharton School Rodney L. White Center for Financial Research.
- Stoll, Hans R, 1978. "The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks," Journal of Finance, American Finance Association, vol. 33(4), pages 1153-72, September.
- David Ikenberry & Josef Lakonishok & Theo Vermaelen, 2000.
"Stock Repurchases in Canada: Performance and Strategic Trading,"
Journal of Finance,
American Finance Association, vol. 55(5), pages 2373-2397, October.
- David Ikenberry & Josef Lakonishok & Theo Vermaelen, 1999. "Stock Repurchases in Canada: Performance and Strategic Trading," NBER Working Papers 7325, National Bureau of Economic Research, Inc.
- Edith Ginglinger & Jacques Hamon, 2007.
"Actual share repurchases, timing and liquidity,"
- Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, vol. 53(1), pages 313-333, 02.
- Michael J. Brennan & Anjan V. Thakor, 2004.
"Shareholder Preferences and Dividend Policy,"
- David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
- Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
- Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
- Brockman, Paul & Chung, Dennis Y., 2001. "Managerial timing and corporate liquidity: *1: evidence from actual share repurchases," Journal of Financial Economics, Elsevier, vol. 61(3), pages 417-448, September.
- Miller, James M. & McConnell, John J., 1995. "Open-Market Share Repurchase Programs and Bid-Ask Spreads on the NYSE: Implications for Corporate Payout Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(03), pages 365-382, September.
- Chowdhry, Bhagwan & Nanda, Vikram, 1994. "Repurchase Premia as a Reason for Dividends: A Dynamic Model of Corporate Payout Policies," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 321-50.
- Lucas, Deborah J. & McDonald, Robert L., 1998. "Shareholder Heterogeneity, Adverse Selection, and Payout Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(02), pages 233-253, June.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Diana R. Franz & Ramesh P. Rao & Niranjan Tripathy, 1995.
"Informed Trading Risk And Bid-Ask Spread Changes Around Open Market Stock Repurchases In The Nasdaq Market,"
Journal of Financial Research,
Southern Finance Association;Southwestern Finance Association, vol. 18(3), pages 311-327, 09.
- Franz, Diana R & Rao, Ramesh P & Tripathy, Niranjan, 1995. "Informed Trading Risk and Bid-Ask Spread Changes around Open Market Stock Repurchases in the NASDAQ Market," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(3), pages 311-27, Fall.
- repec:dau:papers:123456789/1748 is not listed on IDEAS
- Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
- Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 317-355.
- Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
- Nohel, Tom & Tarhan, Vefa, 1998. "Share repurchases and firm performance:: new evidence on the agency costs of free cash flow," Journal of Financial Economics, Elsevier, vol. 49(2), pages 187-222, August.
- Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, 08.
When requesting a correction, please mention this item's handle: RePEc:eee:finmar:v:12:y:2009:i:4:p:832-869. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.