Price Ceiling, Market Structure, and Payout Policies

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. Therefore, price ceilings and reduced market-structure frictions provide one explanation for the secular increase in share repurchases over dividends. Meanwhile, these two frictions always 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