Stock Repurchases and Liquidity

Abstract

We analyze the impact of share repurchases on liquidity based on a new comprehensive data set of realized share repurchases in the US, which covers 50,204 repurchase months between 2004 and 2010. Using instrumental variable analysis we show that repurchases unequivocally improve liquidity and suggest that endogenous controls have confounded results in earlier studies. Liquidity also influences how firms execute repurchase programs. Repurchases provide liquidity when other investors sell the firm’s stock or in times of crisis. There is no evidence that firms reduce liquidity when they trade on private information.

Keywords: Share repurchases, market microstructure, liquidity, limit order markets, informed trading

JEL Classification: G10, G30, G35