TY - JOUR
T1 - Optimal execution of open-market stock repurchase programs
AU - Oded, Jacob
N1 - Funding Information:
I would like to especially thank Avi Wohl for comments and suggestions on the empirical investigation, and Azi Ben-Refael for excellent research assistance and comments. I am grateful for comments from Yakov Amihud, Simon Benninga, Utpal Bhattacharya, Kobi Boudoukh, Alain Coen, Doug Foster, Yaniv Grinstein, Roni Michaely, Allen Michel, Matthew Spiegel, Yu Wang, seminar participants at Bar Ilan University, Boston University, Hebrew University, Tel Aviv University, 2006 FIRS conference in Shanghai, 2006 NFA conference in Montreal, an anonymous referee, and Avaidhar Subrahmanyam (the editor). Financial support from EU-IRG is gratefully acknowledged. All remaining errors are my own. Appendix A
PY - 2009/11
Y1 - 2009/11
N2 - 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.
AB - 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.
KW - Bid-ask spread
KW - Buybacks
KW - Liquidity
KW - Payout policy
KW - Stock repurchases
UR - http://www.scopus.com/inward/record.url?scp=70349749924&partnerID=8YFLogxK
U2 - 10.1016/j.finmar.2009.07.006
DO - 10.1016/j.finmar.2009.07.006
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AN - SCOPUS:70349749924
SN - 1386-4181
VL - 12
SP - 832
EP - 869
JO - Journal of Financial Markets
JF - Journal of Financial Markets
IS - 4
ER -