Price Ceiling, Market Structure, and Payout Policies

Abstract

To prevent firms from manipulating prices, U.S. regulators set price ceilings for open-market share repurchases. We find that market-structure reforms in the 1990s and 2000s dramatically increased share repurchases because they relaxed constraints on issuers seeking to compete with other traders under price ceilings. The Tick Size Pilot Program, a controlled experiment that partially reversed previous reforms, significantly reduced share repurchases. Price-ceiling and market-structure frictions provide a unified explanation of two puzzles: the dividend puzzle exists because issuers encounter these repurchase frictions; share repurchases increase relative to dividends over time because market structure reforms and innovations gradually reduce these frictions.

Keywords: Market Structure, Share Repurchase, Queue Competition, Dark Pool, Regulation

JEL Classification: G18, G35