The Role of Institutional Investors in Open-Market Share Repurchase Programs

Abstract

We use transaction-level institutional trading data and the data on US firms' actual repurchases made available by the 2003 revisions to the Exchange Act to analyze the ability of institutional investors to create an information advantage for themselves around open market share repurchases. We document several results new to the literature. First, institutional trading prior to an open-market share repurchase (OMR) announcement has significant predictive power for the magnitude of the abnormal return to the repurchasing firm’s equity around OMR announcements. Second, institutional trading immediately after an OMR announcement has significant predictive power for the firm’s subsequent stock return performance: the larger the net buying by institutions, better the subsequent long-run stock returns. Third, institutional trading immediately after an OMR announcement has significant predictive power for the actual repurchases by the firm: a larger amount of net buying of the firm’s equity by institutions is associated with a larger actual repurchase by the firm in the subsequent period. Fourth, institutional trading has predictive power for the change in the firm's information asymmetry from before the OMR announcement to after: a larger amount of net buying by institutions is associated with a larger decrease in the degree of information asymmetry facing the firm in the equity market. Finally, institutions are able to realize significant abnormal profits (net of commissions and trading costs) by trading in the equity of firms undergoing open-market repurchases. Overall, our results are consistent with the notion that institutional investors are able to generate a significant information advantage for themselves about firms undertaking OMR programs.