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Repurchasing Shares on a Second Trading Line

FAME Working Paper No. 162

42 Pages Posted: 4 Jan 2006 Last revised: 14 Mar 2013

Christophe Perignon

HEC Paris - Finance Department

Dennis Y. Chung

Simon Fraser University

Dušan Isakov

University of Fribourg - Faculty of Economics and Social Science

Date Written: March 24, 2006

Abstract

This paper studies a unique buyback method allowing firms to reacquire their own shares on a separate trading line where only the firm is allowed to buy shares. This temporary trading platform is opened concurrently with the original trading line on the stock exchange. This share repurchase method is called the Second Trading Line and has been extensively used by Swiss companies since 1997. This type of repurchase is unique for two reasons. First, unlike open market programs, the repurchasing company does not trade under the cover of anonymity. Second, all transactions made by the repurchasing firm are publicly available in real time to every market participant. This is a case of instantaneous disclosure which contrasts sharply with other markets characterized by delayed or no disclosure. Using actual repurchase data from all buybacks implemented through second trading lines, we find that managers exhibit timing ability for the majority of programs. We also document that the daily repurchase decision is statistically associated with short-term price changes. However, we reject the opportunistic repurchase hypothesis and find no evidence that managers exploit their information advantage when reacquiring shares. We also find that repurchases on the second trading line have a beneficial impact on the liquidity of repurchasing firms (i.e., higher trading volumes, smaller bid-ask spreads, and thicker total depths). Exchanges and regulators may consider the second trading line an attractive share reacquisition mechanism because of its transparency and positive liquidity effects.

Keywords: Share Repurchases, Disclosure Environment, Information Asymmetry, Liquidity

JEL Classification: G14, G35

Suggested Citation

Perignon, Christophe and Chung, Dennis Y. and Isakov , Dušan, Repurchasing Shares on a Second Trading Line (March 24, 2006). FAME Working Paper No. 162. Available at SSRN: https://ssrn.com/abstract=873563 or http://dx.doi.org/10.2139/ssrn.873563

Christophe Perignon

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Dennis Y. Chung

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Dušan Isakov (Contact Author)

University of Fribourg - Faculty of Economics and Social Science ( email )

Fribourg, CH 1700
Switzerland

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