Firms as Buyers of Last Resort: Financing Constraints, Stock Returns and Liquidity

44 Pages Posted: 10 Oct 2005

See all articles by Jiang Wang

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management; China Academy of Financial Research (CAFR); National Bureau of Economic Research (NBER)

Jialin Yu

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 2005

Abstract

We develop a model to explore the effects of firms being buyers of last resort on stock returns and liquidity. Those with more ability to repurchase shares when prices drop far below fundamental value (less financially constrained ones) should have lower short horizon relative to long-horizon return variance and more positively skewed returns than other firms. Using standard proxies for financing constraints such as past repurchases and firm age, we find support for both of these predicted relations in the U.S. stock market. Consistent with our theory, these relations are stronger in the U.S. after 1982 when regulatory reforms lowered the legal cost of conducting repurchases; and among the ten largest stock markets in the world, they are stronger in countries where share repurchases are legally easier to execute. Using data on bid-ask spreads and price impact costs, we also find some support for the proposition that firm intervention makes it less risky for other traders to provide liquidity for its stock.

Keywords: financing constraint, payout, asset price, mean reversion, volatility, skewness, liquidity

JEL Classification: G10, G32

Suggested Citation

Wang, Jiang and Yu, Jialin and Hong, Harrison G., Firms as Buyers of Last Resort: Financing Constraints, Stock Returns and Liquidity (December 2005). Available at SSRN: https://ssrn.com/abstract=765425 or http://dx.doi.org/10.2139/ssrn.765425

Jiang Wang

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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China Academy of Financial Research (CAFR)

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National Bureau of Economic Research (NBER)

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Jialin Yu (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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