Share Repurchase Programs and Liquidity: An Examination of Dutch Auction Repurchases

24 Pages Posted: 25 Mar 2005

See all articles by Nandkumar Nayar

Nandkumar Nayar

Lehigh University - College of Business & Economics

Ajai K. Singh

Department of Finance, University of Central Florida

Allan A. Zebedee

Clarkson University

Date Written: March 15, 2005

Abstract

This paper investigates the temporary and permanent effects of Dutch auction share repurchase programs on the liquidity of a firm's equity. The existing evidence on the effects of share repurchase programs is mixed. However, previous studies have focused solely on open market repurchase programs which do not allow for precise estimates of share buy-back intensity to measure liquidity effects. Since firms are under no obligation to disclose when (or even if) they are repurchasing shares, typically little is known about the precise timing and execution of open market repurchases. Furthermore, open market share repurchase programs are often renewed and can span several years. The indefinite time horizon clouds the ability to measure the permanent impact of share repurchase programs on firm liquidity. In this paper we examine Dutch auction format share repurchase programs to circumvent these problems. The advantage of studying the Dutch auction format is twofold. First, the timing, quantity, and price of share repurchases are known since they are announced in company press releases. Second, Dutch auctions typically occur over a relatively short period (typically 20 days). Therefore, our analysis of Dutch auctions share repurchase programs allows us to investigate the short-term effects that occur over the tender period. In addition, we can examine possible lasting effects on liquidity after the repurchase program is over. We find that the improvement in liquidity is transitory and limited to the tender period. Improvements in liquidity over longer intervals appear to be the result of an overall price improvement and reduction in volatility and not a structural change in market dynamics.

Keywords: Share Repurchase Programs, Dutch Auctions, Liquidity

JEL Classification: G35, D82, G14

Suggested Citation

Nayar, Nandkumar and Singh, Ajai K. and Zebedee, Allan A., Share Repurchase Programs and Liquidity: An Examination of Dutch Auction Repurchases (March 15, 2005). Available at SSRN: https://ssrn.com/abstract=687288 or http://dx.doi.org/10.2139/ssrn.687288

Nandkumar Nayar

Lehigh University - College of Business & Economics ( email )

621 Taylor Street, Rauch Business Center
Lehigh University
Bethlehem, PA 18015-3117
United States
610-758-4161 (Phone)
610-758-6429 (Fax)

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

Allan A. Zebedee (Contact Author)

Clarkson University ( email )

Potsdam, NY 13699-5780
United States
315.268.3890 (Phone)

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