Actual Share Reacquisitions in Open-Market Repurchase Programs

Abstract:     
In contrast to Dutch auction repurchases and tender offers, the actual number of shares a firm will ultimately acquire in an open-market repurchase program is uncertain. This uncertainty arises because open-market share repurchase programs provide the firm with the option to repurchase shares, but do not obligate them to do so. In a sample of 450 programs from 1981 to 1990, between 74 percent and 82 percent of the shares announced as repurchase targets are actually acquired by the firm within three years of the repurchase announcement. Our results suggest that firms exploit the flexibility afforded them by the option to repurchase shares in at least two ways: First, share repurchases are negatively related to prior stock price performance, suggesting that firms purchase the stock when it is undervalued and defer when it is overvalued. Second, consistent with liquidity arguments, repurchases are positively related to the levels of cash flow. Overall, the evidence suggests that the flexibility afforded in both the magnitude of actual share repurchases and their timing is one reason why managers choose to repurchase shares through an open-market repuchase program rather than through a Dutch auction or self-tender offer.

JEL Classification: G35

working papers series