Actual Share Reacquisitions in Open-Market Repurchase Programs

Posted: 23 Jul 1998

See all articles by Clifford P. Stephens

Clifford P. Stephens

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: October 17, 1995

Abstract

In contrast to Dutch auction repurchases and tender offers, the actual number of shares a firm will ultimately acquire in an open-market repurchase program is uncertain. This uncertainty arises because open-market share repurchase programs provide the firm with the option to repurchase shares, but do not obligate them to do so. In a sample of 450 programs from 1981 to 1990, between 74 percent and 82 percent of the shares announced as repurchase targets are actually acquired by the firm within three years of the repurchase announcement. Our results suggest that firms exploit the flexibility afforded them by the option to repurchase shares in at least two ways: First, share repurchases are negatively related to prior stock price performance, suggesting that firms purchase the stock when it is undervalued and defer when it is overvalued. Second, consistent with liquidity arguments, repurchases are positively related to the levels of cash flow. Overall, the evidence suggests that the flexibility afforded in both the magnitude of actual share repurchases and their timing is one reason why managers choose to repurchase shares through an open-market repuchase program rather than through a Dutch auction or self-tender offer.

JEL Classification: G35

Suggested Citation

Stephens, Clifford P. and Weisbach, Michael S., Actual Share Reacquisitions in Open-Market Repurchase Programs (October 17, 1995 ). Available at SSRN: https://ssrn.com/abstract=6982

Clifford P. Stephens (Contact Author)

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
2159 CEBA
Baton Rouge, LA 70803-6308
United States
225-578-6334 (Phone)

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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