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The Impact of Asset Repurchases and Issues in an Experimental Market

Listed author(s):
  • Haruvy, E.
  • Noussair, C.N.

    (Tilburg University, Center For Economic Research)

  • Powell, O.R.

    (Tilburg University, Center For Economic Research)

Abstract: We create an experimental asset market in which we conduct share repurchases and share issues. Although the intrinsic value of the shares is independent of the quantity outstanding, the interventions result in changes in asset price. Specifically, we find the following. (1) A repurchase of shares increases the price of the asset, and a share issue decreases the price of the asset, compared to a benchmark of no intervention. These effects are consistent with downward-sloping demand for the asset. (2) The empirical patterns observed are consistent with a model based on that proposed by DeLong et al. (1990), which posits three trader types-- fundamental, speculator, and momentum-interacting in the market. (3) The downward pressure on prices resulting from share issues drives prices down toward, but not beyond, fundamental values. This downward resistance at the fundamental value is predicted by the model, in which it arises from the impact of an intervention on the proportion of the total stock of units and cash held by each trader type.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2012-092.

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Date of creation: 2012
Handle: RePEc:tiu:tiucen:8f1cf177-abfb-4cf3-8649-0292b1b5f442
Contact details of provider: Web page: http://center.uvt.nl

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