Price Ceilings, Market Structure, and Payout Policies
79 Pages Posted: 16 Nov 2018 Last revised: 22 Jan 2024
Date Written: September 28, 2018
Abstract
To prevent issuers from inflating their share prices, SEC Rule 10b-18 sets price ceilings on share repurchases through open markets. We find that market-structure reforms in the 1990s and 2000s dramatically increased share repurchases because they relaxed constraints on issuers competing with other buyers under price ceilings. The Tick Size Pilot Program, a controlled experiment that partially reversed previous reforms, significantly reduced share repurchases. We estimate that price ceilings and reduced market-structure frictions explain 18% of the secular increase in share repurchases. Meanwhile, these two frictions still exist, which explains why share repurchases have not crowded out dividends entirely.
Keywords: Market Structure, Share Repurchase, Queue Competition, Dark Pool, Regulation
JEL Classification: G18, G35
Suggested Citation: Suggested Citation