Share Repurchase Programs and Liquidity: An Examination of Dutch Auction Repurchases
24 Pages Posted: 25 Mar 2005
Date Written: March 15, 2005
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: Suggested Citation