The Impact of Asset Repurchases and Issues in an Experimental Market

CentER Discussion Paper Series No. 2012-092

39 Pages Posted: 23 Nov 2012

See all articles by Ernan Haruvy

Ernan Haruvy

Independent

Charles N. Noussair

Tilburg University

Owen Powell

University of Vienna - Department of Economics; Vienna Center for Experimental Economics

Date Written: November 21, 2012

Abstract

We create an experimental asset market in which we conduct share repurchases and share issues. Although the intrinsic value of the shares is independent of the quantity outstanding, the interventions result in changes in asset price. Specifically, we find the following. (1) A repurchase of shares increases the price of the asset, and a share issue decreases the price of the asset, compared to a benchmark of no intervention. These effects are consistent with downward-sloping demand for the asset. (2) The empirical patterns observed are consistent with a model based on that proposed by DeLong et al. (1990), which posits three trader types -- fundamental, speculator, and momentum -- interacting in the market. (3) The downward pressure on prices resulting from share issues drives prices down toward, but not beyond, fundamental values. This downward resistance at the fundamental value is predicted by the model, in which it arises from the impact of an intervention on the proportion of the total stock of units and cash held by each trader type.

Keywords: Experiment, Share Issue, Share Repurchase, Bubble

JEL Classification: C9

Suggested Citation

Haruvy, Ernan and Noussair, Charles N. and Powell, Owen, The Impact of Asset Repurchases and Issues in an Experimental Market (November 21, 2012). CentER Discussion Paper Series No. 2012-092, Available at SSRN: https://ssrn.com/abstract=2178997 or http://dx.doi.org/10.2139/ssrn.2178997

Ernan Haruvy

Independent ( email )

Charles N. Noussair (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Owen Powell

University of Vienna - Department of Economics ( email )

Bruennerstrasse 72
Vienna, A-1210
Austria

Vienna Center for Experimental Economics ( email )

Oskar-Morgenstern-Platz 1
Vienna, Vienna 1090
Austria

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