Do Institutions and Firms Trade in Tandem With One Another? Evidence From Share Repurchases
52 Pages Posted: 7 Jun 2019
Date Written: January 20, 2019
I study repurchase motives by examining trading from institutional investors, usually considered informed traders, around the events. When firms conduct repurchases, the likelihood of institutional selling increases and institutional buying decreases, consistent firms repurchasing to provide liquidity to institutional traders. A negative relation between repurchase intensity and changes in institutional ownership before and during repurchase quarter, but not in the quarter after the events, suggests that firms buy back shares to provide liquidity to institutional selling and not vice versa. The results hold across all types of institutions and are stronger for illiquid stocks. Institutional trading adds value to repurchase signals: Repurchases with concurrent institutional buying are associated with significantly higher abnormal returns than those with net institutional selling in the quarter before and up to two quarters in the future around share repurchases. The relation between ex-post returns and institutional trading is stronger for active and transient institutions.
Keywords: institutional investors, institutional holding, share repurchases, liquidity
JEL Classification: G23, G35
Suggested Citation: Suggested Citation