Optimal Execution of Open-Market Stock Repurchase Programs

Abstract

We provide a theoretical investigation of the execution of open-market stock repurchase programs. Our model suggests that the execution depends on availability of free cash and information asymmetry. The results highlight important features of open-market stock repurchase programs: they leave the firm the option to avoid payout when cash is needed for operations, yet they also disburse free cash as long as the stock is not severely overpriced. Because they are preformed at management discretion, however, repurchase programs also re-distribute wealth among shareholders. The model generates predictions about the completion rate of the programs and about the bid-ask spread during the repurchase period that might explain inconsistencies among earlier empirical studies.