Why Do Repurchases Affect Share Prices? New Evidence from Closed-End Funds

Abstract

Repurchases increase share prices, but there is no consensus as to why this happens. We provide new evidence by examining repurchases made by closed-end-fund companies, which have the advantage of prices and asset values that are transparent and publicly available. Short-term gains following repurchase announcements are modest and consistent with a market-timing arbitrage. Long-term gains are larger and are recorded for both price and operating (asset) performance. The gains are consistent with a signal from directors that, given repurchase authority, fund size, and hence fund management fees, will become conditional on fund performance. Governance is therefore an important element in explaining the repurchase puzzle for these companies.

Keywords: repurchases, long-term performance, closed-end funds, governance, fund management

JEL Classification: G32, G35