Share Repurchase Programs and Liquidity: An Examination of Dutch Auction Repurchases

Abstract

ABSTRACT The existing evidence on the liquidity effects of share repurchase programs is mixed. However, previous studies 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. Consequently, we examine Dutch auction share repurchase programs to circumvent these problems, and investigate the temporary and permanent effects of repurchase programs on liquidity. The advantage of studying the Dutch auction format is twofold. First, the timing, quantity, and price of repurchases are known from company press releases. Second, Dutch auctions occur over a relatively short period (average tender period is typically 30 days). Therefore, our analysis of Dutch auction share repurchase programs allows us to investigate the short-term effects that occur over the one-month tender period. More importantly, 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 one-month tender period when the firm’s offer to repurchase shares is outstanding. Improvements in liquidity over longer intervals (or permanent impacts due to the share repurchase program) appear to be the result of an overall price improvement and a reduction in volatility and not because of a structural change in market dynamics. In sum, our results dovetail with those of Cook, Krigman, and Leach (2004) where improved liquidity occurs on the days when the firm actually enters the market and repurchases shares.