A Model of Strategic Stock Buybacks
49 Pages Posted: 14 Mar 2020
Date Written: February 19, 2020
This paper studies the authorization and execution of buybacks in a Kyle micro-structure setting with two informed parties: a speculator who trades on his own account and a manager who implements buybacks for the firm. Buybacks introduce two opposing economic forces. On the one hand, informed buybacks intensify the competition for trading profits, making it more difficult to profit from private information. On the other, buybacks generate gains and losses that increase the dispersion of the firm's per-share value across different payoff states, making private information more valuable. Less informative buybacks weaken the first force, while strengthening the second. The manager's incentive to manipulate the current stock price in order to increase her compensation constrains how much buybacks reflect her private information. The model generates novel predictions linking the structure of the manager's compensation, the buyback authorization decision, and trading outcomes following buybacks.
Keywords: share repurchases, liquidity, informed trading, payout policy, multi-trader Kyle model
JEL Classification: D82, G14, G30, G35
Suggested Citation: Suggested Citation