IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Liquidity Changes Associated with Open Market Repurchases

Listed author(s):
  • Ajai K. Singh
  • Mir A. Zaman
  • Chandrasekhar Krishnamurti

Before the tax-law changes of 1986, common stock repurchases received favorable tax treatment relative to cash dividends, yet more than 80% of the New York Stock Exchange-listed firms did not use repurchases for distributing value to their stockholders. Prior research suggests a possible resolution of the puzzle by examining the effect of open market repurchases on the liquidity of the firms' stocks. The liquidity of the stock as measured by bid-ask spread may be affected by stock repurchases in any one or all of the following ways. First, when management undertakes to reacquire the firm's shares in the open market they are, in effect, competing with the market makers of the stock. This open market repurchase activity, in the absence of information asymmetry, should result in greater liquidity or lower bid-ask spread. Second, a direct consequence of open market repurchase announcements may be increased trading in the secondary market. Increased trading volume makes it easier for the market maker to reverse his position in the stock. Therefore, the inventory holding cost component of bid-ask spread should decline upon announcements of open market repurchases. A decline in the bid-ask spread would be consistent with this explanation. Third, prior research suggests that open market repurchase announcements are associated with increased trading by informed traders in the secondary market for the firm's stock. Informed traders trade with market makers only at favorable prices. Hence, the adverse selection component of the bid-ask spread should increase in the post-announcement period. This information-asymmetry- based explanation predicts increased bid-ask spreads following announcements of open market repurchases. However, it should be noted that an asymmetric-information-based explanation does not necessarily imply that other market participants face the informed traders in all trades at all times. Specifically, the likelihood of trading with an informed trader is greater when stock prices are lower rather than higher. Also, repurchases only involve buying and not selling by informed traders. Hence, the risk of trading against the informed trader is much less.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Article provided by Financial Management Association in its journal Financial Management.

Volume (Year): 23 (1994)
Issue (Month): 1 (Spring)

in new window

Handle: RePEc:fma:fmanag:singh94
Contact details of provider: Postal:
University of South Florida 4202 E. Fowler Ave. COBA #3331 Tampa, FL 33620

Phone: 813-974-2084
Fax: 813-974-3318
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fma:fmanag:singh94. 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: (Courtney Connors)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.