Optimal execution of open-market stock repurchase programs |
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Authors: | Jacob Oded |
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Institution: | aSchool of Management, Boston University, 595 Commonwealth Avenue, Boston, MA 02215, USA;bFaculty of Management, Tel Aviv University, Tel Aviv 69978, Israel |
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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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Keywords: | Payout policy Stock repurchases Buybacks Bid– ask spread Liquidity |
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