No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Managerial timing and corporate liquidity:: evidence from actual share repurchases
Abstract
We investigate the timing of open market share repurchases and the resultant impact on firm liquidity. Using the Stock Exchange of Hong Kong's unique disclosure environment, we identify the exact implementation dates for more than five thousand equity buybacks. We find that managers exhibit substantial timing ability. Consistent with the information-asymmetry hypothesis, bid–ask spreads widen and depths narrow during repurchase periods. We decompose bid–ask spreads and show that adverse selection costs increase substantially as market participants respond to the presence of informed managerial trading. Our findings provide additional insight into how markets process information and have significant implications for corporate payout and disclosure policies.
... Regarding SRP implementations in foreign markets, Brockman and Chung (2001) and Zhang (2005) study the Hong Kong capital market, where firms are required to disclose repurchase details no later than the next trading day. Brockman and Chung (2001) find that managers acquire shares at a lower cost than a naive accumulation strategy, a result consistent with either timing based on insider information, or price support. ...
... Regarding SRP implementations in foreign markets, Brockman and Chung (2001) and Zhang (2005) study the Hong Kong capital market, where firms are required to disclose repurchase details no later than the next trading day. Brockman and Chung (2001) find that managers acquire shares at a lower cost than a naive accumulation strategy, a result consistent with either timing based on insider information, or price support. In contrast, Zhang (2005), using a novel estimation technique by retaining in the sample only the first daily announcement in a sequence of multiple repurchase announcements within a month, finds evidence consistent with price support. ...
... In the Greek stock market, which is the focus of our paper, and for the period we are studying, firms disclose their repurchases within seven trading days. Compared to the institutional setting of other published studies on actual share repurchases, the Greek disclosure requirement is different from the daily requirement of Hong-Kong (Brockman and Chung, 2001) or Australia (Akyol and Foo, 2013), and the monthly requirement of France in the 2000-2002 period (Ginglinger and Hamon, 2007). Because the institutional setting is different from other countries, an empirical study of the Greek market would allow us to understand further these controversies. ...
... Regarding SRP implementations in foreign markets, Brockman and Chung (2001) and Zhang (2005) study the Hong Kong capital market, where firms are required to disclose repurchase details no later than the next trading day. Brockman and Chung (2001) find that managers acquire shares at a lower cost than a naive accumulation strategy, a result consistent with either timing based on insider information, or price support. ...
... Regarding SRP implementations in foreign markets, Brockman and Chung (2001) and Zhang (2005) study the Hong Kong capital market, where firms are required to disclose repurchase details no later than the next trading day. Brockman and Chung (2001) find that managers acquire shares at a lower cost than a naive accumulation strategy, a result consistent with either timing based on insider information, or price support. In contrast, Zhang (2005), using a novel estimation technique by retaining in the sample only the first daily announcement in a sequence of multiple repurchase announcements within a month, finds evidence consistent with price support. ...
... In the Greek stock market, which is the focus of our paper, and for the period we are studying, firms disclose their repurchases within seven trading days. Compared to the institutional setting of other published studies on actual share repurchases, the Greek disclosure requirement is different from the daily requirement of Hong-Kong (Brockman and Chung, 2001) or Australia (Akyol and Foo, 2013), and the monthly requirement of France in the 2000-2002 period (Ginglinger and Hamon, 2007). Because the institutional setting is different from other countries, an empirical study of the Greek market would allow us to understand further these controversies. ...
Using a unique, hand-collected data set of actual daily share repurchases from the Athens Stock Exchange, we examine the stock market reaction around the disclosure date of actual share repurchases, the factors that affect the size of that reaction, and the motives behind share acquisitions. We find that different firms proceed to actual repurchases for different reasons: the results for the small firms and the firms with high book-to-market ratio repurchases are consistent with the signaling undervaluation hypothesis, while the results for the large firms and firms with low book-to-market ratio are in line with the price support hypothesis. In contrast to other studies, we find that long-term abnormal returns are higher for repurchasing firms compared to non-repurchasing controls and depend positively on the frequency of repurchases.
... Regarding SRP implementations in foreign markets, Brockman and Chung (2001) and Zhang (2005) study the Hong Kong capital market, where firms are required to disclose repurchase details no later than the next trading day. Brockman and Chung (2001) find that managers acquire shares at a lower cost than a naive accumulation strategy, a result consistent with either timing based on insider information, or price support. ...
... Regarding SRP implementations in foreign markets, Brockman and Chung (2001) and Zhang (2005) study the Hong Kong capital market, where firms are required to disclose repurchase details no later than the next trading day. Brockman and Chung (2001) find that managers acquire shares at a lower cost than a naive accumulation strategy, a result consistent with either timing based on insider information, or price support. In contrast, Zhang (2005), using a novel estimation technique by retaining in the sample only the first daily announcement in a sequence of multiple repurchase announcements within a month, finds evidence consistent with price support. ...
... In the Greek stock market, which is the focus of our paper, and for the period we are studying, firms disclose their repurchases within seven trading days. Compared to the institutional setting of other published studies on actual share repurchases, the Greek disclosure requirement is different from the daily requirement of Hong-Kong (Brockman and Chung, 2001) or Australia (Akyol and Foo, 2006), and the monthly requirement of France in the 2000-2002period (Ginglinger and Hamon, 2007. Because the institutional setting is different from other countries, an empirical study of the Greek market would allow us to understand further these controversies. ...
Using a unique, hand-collected data set of actual daily share repurchases from the Athens Stock Exchange, we examine the stock market reaction around the disclosure date of actual share repurchases, the factors that affect the size of that reaction, and the motives behind share acquisitions. We find that different firms proceed to actual repurchases for different reasons: the results for the small firms and the firms with high book-to-market ratio repurchases are consistent with the signaling undervaluation hypothesis, while the results for the large firms and firms with low book-to-market ratio are in line with the price support hypothesis. In contrast to other studies, we find that long-term abnormal returns are higher for repurchasing firms compared to non-repurchasing controls and depend positively on the frequency of repurchases.
... It is interesting to note that, in many countries, especially emerging countries where shareholder right are weak, share repurchases have been illegal initially (see eg; Zhang (2002) and Wada (2005) for Japan, Lamba and Ramsay 2000 for Australia, Brockman and Chung (2001) for Hong Kong). It seems a supporting evidence of Jiraporn (2006) and La Porta et al. (1997). ...
... In this case, repurchases may be used as a commitment device (not to take the value reducing project). Now, repurchases and share-holder rights may be substitutes 5 . ...
... For example, please seeZhang (2002) andWada (2005) for Japan,Lamba and Ramsay (2000) for Australia,Brockman and Chung (2001) for Hong Kong.3 Hence, our analysis provides a natural complement to the analysis of LaPorta et al. (1997) who analyze whether dividends and investor protection are substitutes or complements. ...
This paper provides a theoretical analysis of the effects of the strength of investor rights on a firm’s share repurchase policy in the face of agency conflicts and behavioural biases. We consider three reasons for firms to repurchase their shares; to eliminate agency costs of free cash-flow, to time the market, and to cater to investors. In the first case, we demonstrate that investor rights and repurchases may be complements or substitutes in addressing free cash flow problems. In the second case, we argue that stronger investor rights increase informational disclosure which reduces the ability to time the market using repurchases. In the final case, we argue that stronger investor rights may reduce value reducing repurchase catering. We consider the corporate governance implications of our analysis, and discuss the effects of behavioural factors, such as bounded rationality, overconfidence, and regret, on the efficacy of governance systems to deal with the problems relating to repurchases
... Many studies Cole et al., 1996;Dittmar, 2000) find that stock repurchases are driven by market timing of managers. Brockman and Chung (2001) examine the market-timing ability using repurchase trading data of 190 firms in Hong Kong. The studies provide evidence that post aggregate market turndown, managers time the market along with their trading by paying a lower price for the shares bought. ...
... Similar results were obtained using 248 repurchase announcements in NYSE (Miller and McConnell, 1995). Brockman and Chung (2001) did this for firms in Hong Kong and find that the presence of informed traders in the market hits up the adverse selection costs. This widens the bid-ask spread and reduces the depth in the market. ...
This study aims to synthesise and analyse the existing literature on share repurchases. It summarises the key findings and identifies the potential research gaps in the extant literature. A pool of 206 research articles are chosen based on relevance and impact from a variety of reputed databases spanning over 1981 to 2020. The authors use the guideline of Templier and Pare (2015) and follow the narrative approach of literature review which consists of gathering and synthesising existing literature on share buyback. The diverse strands of literature on buyback are classified based on different research themes. The results indicate a paucity of research on share buyback in emerging markets (e.g., India and China). Overall, the research in the following areas is found to be sparse: buyback and firms reputation and the wealth effect of buyback on bondholders. The impact of executive reward schemes post buyback and presence of industry effect remains largely untapped.
... Dittmar, 2000;Fama and French, 2001;Jiang et al., 2013;Miller and Prondzinski, 2017), the liquidity changes hypothesis (e.g. Barclay and Smith, 1988;Brockman and Chung, 2001;Ginglinger and Hamon, 2007;Hillert et al., 2012;Moore, 2017), the tax saving hypothesis (e.g., Bagwell and Shoven, 1989;Jacob and Jacob, 2013;Korkeamaki et al., 2010;Moser, 2009;Oswald and Young, 2004;Rau and Vermaelen, 2002), the takeover deterrence hypothesis (e.g. Bagwell, 1991;Billett and Xue, 2007;Hai and Doan, 2012), the optimal capital structure hypothesis (e.g. ...
... Similarly, Hatakeda and Isagawa (2004) indicate that share buyback announcements dramatically increased in Japan for the period from 1995 until 1998. Brockman and Chung (2001) observe that only 8 Hong Kong share buyback programs in 1992, while in 1995 there were 100 shares buyback announcements. ...
This paper reviews the trends and motivations of share buyback programs and highlights the different hypotheses that motivate companies to repurchase their shares. It then explores the share buyback phenomena among Malaysian listed firms during the years from 2010 to 2015. The paper also investigates whether the Malaysian listed firms use share buyback programs to manage their earnings. Based on our manually collected data, we find that 836 firms engage in share buybacks during the period from 2010 to 2015. We employ the criteria of Hribar et al. (2006) to check whether share buyback strategies were used to manipulate earnings per share (i.e. accretive share buyback). We find that more than 75% of firms engage in accretive share buybacks at least one time during the period. Specifically, those firms undertake 637 accretive share buybacks with a value of RM 7.650 billion. This paper contributes to a better understanding of share buyback strategies in general and accretive share buybacks in the Malaysian context. Finally, our findings provide a reference point for relevant parties to improve the applicable regulations of share buyback schemes.
... They argue that the level of market liquidity is a significant determinant for managers in deciding whether to repurchase stocks instead of paying dividends. Hillert et al. (2016) find that firms primarily buy back shares when liquidity is high as they try to reduce transaction costs which is in line with Brockman and Chung (2001). The effect of share buybacks on stock liquidity is controversial. ...
... See e.g.Barclay and Smith (1988),Brockman and Chung (2001) orGinglinger and Hamon (2007) for liquidity deteriorations andCook et al. (2004) orChung et al. (2007) for liquidity improvements. ...
We study share repurchase announcements for nine European countries between 2000 and 2017. In contrast to previous studies, we address the role of market uncertainty as a market-based determinant of positive average abnormal announcement returns, while including governance, liquidity risk and firm related control variables. Economic policy uncertainty and financial uncertainty, individually as well as jointly, positively affect abnormal returns. We suggest that this relation is due to a stronger signaling effect under increased uncertainty, as both information asymmetry and underpricing tend to increase. Also, a potential hedge against adverse market movements is more valuable. Optimal timing of repurchase announcements should therefore consider market uncertainty conditions.
... Managers exercise tremendous discretion over the implementation of these programs. 2 Evidence suggests that managers use this discretion and their private information to execute buybacks at favorable prices (see Brockman and Chung 2001, Ikenberry et al. 2000, Cook et al. 2004, Dittmar and Field 2015. Traditionally, the literature asserts that informed buybacks hurt shareholders. ...
... The literature on buybacks emphasizes how informed managerial trading in the form of a share repurchase program hurts shareholders (e.g., Barclay and Smith 1988, Brockman and Chung 2001, Babenko et al. 2020. That conventional view suggests that the firm could protect its shareholders by committing to not use the manager's private information in the implementation of buybacks. ...
This paper studies buybacks in a setting with two informed parties: a manager implementing buybacks and an outside speculator. Contrary to conventional wisdom, uninformed buybacks reduce liquidity and lower shareholder welfare in this setting. Buybacks introduce two opposing economic forces. They intensify the competition for trading profits, making informed trading less profitable. They also make the per-share value of the firm higher (lower) when its shares are undervalued (overvalued); the increased dispersion makes informed trading more profitable. Less informative buybacks weaken the first effect while strengthening the second. Managerial incentives to inflate the current stock price constrain the informativeness of buybacks. The model generates novel predictions linking managerial compensation, buybacks, and trading outcomes.
... Over recent decades, open-market share repurchases (OMR) have become a popular means for firms to payout excess cash to shareholders in many countries (See, for example, Brockman and Chung (2001) in Hong Kong; Grullon and Michaely (2004) in the US; Ikenberry, Lakonishok and Vermaelen (2000) in Canada; and Rau and Vermaelen (2002) in the UK). Many studies have attempted to provide explanations for the positive market reactions normally associated with open market share repurchase announcements and managerial motives to repurchase shares. ...
... For example, Cook et al. (2004); Franz et al. (1995); Singh et al. (1994); and Wiggins (1994) find that open market share repurchases help enhance liquidity. In contrast, Barclay and Smith (1988); Brockman and Chung (2001); and Ginglinger and Hamon (1997) find a negative impact of share repurchases on liquidity. Nevertheless, Kim (2004) and Miller and McConnell (1995) find no significant change in liquidity as a result of open market share repurchases. ...
... On the macro front, Chung et al. (2013) report that liquidity decreases after monetary policy announcements in the U.S. markets. Liquidity also changes following firm-specific announcements such as share purchases (Barclay and Smith, 1988;Brockman and Chung, 2001;Cook, Krigman and Leach, 2004;Ginglinger and Hamon, 2007;Miller and McConnell, 1995;Hillert, Maug, and Obernberger, 2016); equity offerings (Balachandran et al. (2012) and Kothare (1997)); or dividend announcements (Graham, Koski, and Loewenstein (2006)). By connecting the two streams of banking and financial markets literature, we extend the current literature by analyzing the impact of bank loan announcements on the liquidity of borrowers' stocks. ...
We examine the impact of bank loan announcements on stock liquidity. Using a comprehensive loan announcement sample over 14 years in Australia, we find that effective spreads and realized spreads of borrowers’ stocks fall after the announcements. The findings suggest these announcements send positive signals about borrowers to the market that increases liquidity provision, and reduce transaction costs, leading to improved liquidity for borrowers’ stocks. This liquidity improvement is more pronounced following announcements of new loans than loan renewals. Overall, our findings provide practical implications for firm managers in the financing decision-making process and market participants in trading strategy adjustment.
... Studies have shown that transaction costs increase in the presence of insider trading because liquidity providers will widen bid-ask spreads to be compensated for trading in an environment that is wrought with asymmetric information (Copeland and Galai 1983;Kyle 1985;Glosten and Milgrom 1985; Barclay and Smith 1988;Bettis et al. 2000;Brockman and Chung 2001;Du and Wei 2004). Additionally, other studies have argued that insider trading creates an incentive to manipulate the timing and content of information releases (Ausubel 1990;Allen and Gale 1992), both of which can induce volatility in stock prices (see e.g., Du and Wei 2004 for empirical evidence). ...
The ethical considerations of insider trading have been widely debated in the academic literature (see e.g., Moore in J Bus Ethics 9(3):171–182, 1990). In 2013, the STOCK Act, which was initially passed to mitigate insider trading by government officials, was quickly and unexpectedly amended to allow certain government employees to withhold their financial information. To identify and quantify the potential costs placed on investors by non-corporate insider traders, we use the unusual circumstances surrounding this amendment. For a sample of stocks most held by members of Congress, we find that, relative to control stocks, liquidity significantly worsens and volatility increases during the post-amendment period. Our results highlight the costs that are incurred by investors in the presence of non-corporate insider trading. These findings call for a stronger development of an ethical framework that justifies the restriction of all types of insider trading.
... One reason for the mixed results is that the disclosure environment makes it difficult to conduct event studies for share repurchase announcements. Many U.S. corporations repurchase their shares without making any announcements and so empirical analyses, such as event studies that require precise information on the timing and prices, are difficult to conduct (Brockman and Chung 2001). One outcome of the varied results for the information content of share repurchase policies is that prior studies offer a mixed understanding of their economic consequences. ...
In this study we investigate the information content of firm payout policy to shareholders. We focus on the association between a firm’s payout policy and shareholders’ satisfaction with board directors, as expressed by the percentage of negative or withheld votes for directors during annual elections (shareholders’ dissent voting). We fill a gap in the literature by using shareholders’ voting results in the election of board members at annual meeting as a setting to examine shareholder perception of firms’ payout policies. We find that higher share repurchase and/or higher dividend payout are associated with lower shareholders’ dissenting votes. We also find that such relationship is conditional on the level of free cash flow, firm future performance, the degree of management entrenchment, and the type of institutional investors. Our study contributes to the payout literature by providing empirical evidence that shows the outcome of shareholders’ votes in director elections may be influenced by the board of directors’ payout decisions.
... Firms generally repurchase stock in the situations of distributing excess/idle cash (Dittmar, 2000) or because of stock price undervaluation (Brockman & Chung, 2001;Peyer & Vermaelen, 2007), or due to lack of investment opportunities (Grullon & Michaely, 2004) or to indicate robust future performance (Lie, 2005), or to boost earnings per share by diluting the effect of stocks options (Bens, Nagar, Skinner, & Wong, 2003) or perceiving the high risk of takeovers by other firms in the market (Doan, Yap, & Gannon, 2012). ...
The efficient market hypothesis states that in the efficient markets, participants cannot make extra-normal returns by exploiting any publicly available information. However, traders are constantly looking to exploit publicly available information to generate abnormal returns for themselves and their clients. One such event is share buyback announcement, which traders can utilize to create profitable trading strategies. The authors undertake the present study to examine if share buyback announcements provide profitable trading strategies to traders. Event study methodology has been adopted to analyze buyback announcements by Indian companies from January 2012 to December 2018. Forty-one (41) day window period comprising of 20 days pre-event, an announcement day, and 20 days post-event period is created to analyze the risk-adjusted average abnormal returns. The empirical findings suggest that there are negligible trading opportunities available for investors post announcements. However, significant risk-adjusted returns are found in the pre-event window, indicating that if investors can predict buyback announcements, they may earn extra-normal returns. The study confirms that Indian stock markets are in the semi-strong form of efficiency. The study also provides a profitable trading strategy for investors in the pre-event window. Finally, it also draws the regulators’ attention to see if insider trading could be the reason for abnormal returns in the pre-event window. The authors conclude the results by confirming that Indian markets are semi-strong in market efficiency and by indicating regulatory interventions to control insider trading.
AcknowledgementThe infrastructural support provided by FORE School of Management, New Delhi in completing this paper is gratefully acknowledged.
... These findings are consistent with the underlying idea that managers know firms' future cash flow better than outside investors. Indeed, previous studies show that managers successfully time the market: Wurgler (2002, 2000), Cohen et al. (2007), andDeAngelo et al. (2010) for SEOs; Brockman andChung (2001), Cook (2003), Ginglinger and Hamon (2007), and Zhang (2002) for repurchases. 2 The overvaluation hypothesis also predicts that stock prices increase before SEO announcements and that pre-announcement returns are negatively related to post-announcement stock returns. ...
We examine whether and how the market interacts with investor sentiment in the context of seasoned equity offerings (SEOs) by Chinese listed firms. We adopt the component of market index return, which cannot be explained by fundamental macro-economic factors as a proxy for the market-wide investor sentiment, and overnight stock returns proxying for the firm-specific sentiment. We find robust evidence that investor sentiment drives the pre-announcement abnormal return. In the post-announcement period, the market corrects the sentiment-driven overvaluation within about one month. These findings reinforce the view that market timers take advantage of investor sentiment to issue seasoned shares.
... If misvaluation occurs because of asymmetric information between market participants and the firm, market participants are likely to infer from the firm's equity repurchase and issuance decisions that the share price may be overvalued or undervalued and then bid the price down or up. See, for example, the evidence in Brockman and Chung (2001). Further, even in the absence of asymmetric information or misvaluation, there can be a price impact for large trades if some traders face capacity or margin constraints, as in Gârleanu and Pedersen (2011) or He and Krishnamurthy (2013). ...
We quantify how much nonfundamental movements in stock prices affect firm decisions. We estimate a dynamic investment model in which firms can finance with equity or cash (net of debt). Misvaluation affects equity values, and firms optimally issue and repurchase overvalued and undervalued shares. The funds flowing to and from these activities come from either investment, dividends, or net cash. The model fits a broad set of data moments in large heterogeneous samples and across industries. Firms respond to misvaluation by adjusting financing more than by adjusting investment. Managers' rational responses to misvaluation increase shareholder value by up to 8%.
... In the first stage, we use the full sample to estimate the probability of a management forecast falling within the repurchase event window based on a set of exogenous or predetermined instrumental variables identified in prior research (Brockman and Chung 2001;Brockman et al. 2008) along with the control variables used in Eq. (1). We employ logistic regressions clustered by year and industry to estimate the following equation: ...
We show that corporate governance mechanisms play an important role in controlling managers’ opportunistic behavior. Low executive equity compensation and a high intensity of outside monitoring help to discourage undesirable self-interested disclosure decisions by management before share repurchases. Corporate governance mechanisms also have a significant impact on long-run abnormal stock prices and operating performance. Firms that manipulate pre-repurchase disclosures experience positive long-term abnormal stock returns. However, we do not find that these firms experience positive long-run operating performance. Corporate governance mechanisms significantly attenuate the tendency toward negative pre-repurchase disclosures and their effects on stock prices and operating performance.
... We do not analyze trading profits around actual buyback activity. Although there is a growing literature measuring whether companies can buy back shares at discounts from market prices over short horizons (Dittmar and Field (2015), Bonaime, Hankins, and Jordan (2016) in the United States, McNally, Smith, and Barnes (2006) in Canada, Brockman and Chung (2001) in Hong Kong, and Zhang (2002) in Japan), we consider these more as tests of broker execution quality, not of the ability of managers to exploit fundamental misvaluation. One argument against using buyback authorizations (instead of completions) is that not all buybacks are completed (Stephens and Weisbach (1998)); indeed, the fact that a buyback authorization was not completed does not mean that it was a false signal or a manipulation attempt in the first place. ...
Using a sample of over 9,000 buyback announcements from 31 non-U.S. countries, we find support for the results of studies based on U.S. data: on average, share repurchases are associated with significant positive short-term and long-term excess returns. However, excess returns depend on the likelihood of undervaluation and the efficiency and liquidity of equity markets. In contrast to findings in U.S. markets, we do not find that these long-term excess returns are simply a compensation for takeover risk or have become less significant in recent years.
... The financial literature assumes that price significantly explains stock liquidity. Indeed, the studies ofAttig et al., (2006), Brockman andChung (2001), andAjina et al., (2015) found that stock price positively correlates with liquidity. Ascioglu et al., (2012) showed a negative relationship between stock liquidity and price. ...
... Repurchasing equity signals the undervaluing of firms (Brockman and Chung 2001;Peyer and Vermaelen 2007) and strong future performance (Lie 2005). In equity crowdfunding, corporations buy back shares at 8 % to 12 % premiums of the investment in the repurchasing promises. ...
This article draws on signal theory and the research findings of local bias in VC to examine how geographic distance (GD) and different signals affect equity crowdfunding platforms launching projects online. We find that local bias still exists in the pre-investment stage of equity crowdfunding. Equity crowdfunding platforms prefer to launch local projects online. We also prove that signals of media usage and start-ups’ quality (credit) are positively correlated with the launching of projects on platforms. Moreover, the platform is more inclined to list projects initiated by firms engaging in strategic emerging industries online. Above all, the signal of project risk fully mediates the relationship between start-ups’ quality and the launching of projects online. Empirical analyses are based on the dataset of equity crowdfunding projects on the Dahuotou equity crowdfunding platform ( http://www.dahuotou.cn/ ) during 2014–2017.
... The financial literature assumes that price significantly explains stock liquidity. Indeed, the studies ofAttig et al., (2006),Brockman andChung (2001), andAjina et al., (2015)found that stock pricepositively correlates with liquidity. ...
... For information, the link between repurchases on the market and the liquidity of the company's securities was recently the subject of several studies (Brockman and Chung, 2001;Cook andHamon., 2006) . The latest study was carried out on the French market. ...
... ( Brockman and Chung, 2001;Zhang, 2005;and McNally et al., 2006). In the long-term (over many years), Ikenberry et al. (2000) and Oswald and Young (2004) reinforce the notion that in general managers strategically time their repurchases to take advantage of decreasing prices. ...
... This finding is consistent with the argument presented byEvans and Evans (2001), who suggested that the implementation of a repurchasing strategy cannot guarantee the firm's superior long-run performance. The non-persistence of CARs is likely due to market uncertainties over the managers' ability to time repurchase announcements, where managers only buy back shares following declines in the prices for the stocks covered by their options agreements (Brockman & Chung, 2001;Cook et al., 2004). ...
By combining the market model with the three-factor model, this study investigates fir ms' share returns after the announcement of share repurchase. Employing data for Chi na's A-share market, this study's sample utilizes 417 share repurchase announcements over the pe riod of 2000 to 2012. Empirical results show that firms with higher sales gro wth rates are more likely to send a positive signal to the market through their share repur chase efforts. Analysis also shows that the higher a firm's price-to-earnings ratio (utilized as a measure of overvaluation), the lower the firm's cumulative abnormal returns. These results imply that Chinese share markets put more emphasis on the firm's future growth and share overvaluation.
... Many researches has found including the research from El-houchine and Boubaker (2014) commented about the " market timing " theory, that the managers will conduct repurchasing shares when the company security is undervalued. And,Firth and Yeung (2005)also stated that the perception of undervalued shares and the availability of cash surplus are the major factors in the decision to repurchase These reviews were validated byBrockman andChung (2001), Cook et al. (2004), andChung et al. (2007)who confirm the predictions of the of " market timing " theory which stipulates that the real repurchase is due to utilizing an information asymmetry between the investors and managers and that they carry out repurchases at a time when the firm is undervalued. In what it concerns the timing of share repurchase, literature confirmed the existence of certain waves or cycles of this phenomenon, for different reasons. ...
The objective of this research is to study the influence of Undervaluation, Free Cash Flow, Leverage and Dispersion of Ownership's toward Company's Stock Repurchase (An Empirical Study of Indonesia Stock Exchange Public Listed Companies). Many researchers have shown that the Stock Repurchase has shown the best alternatives for the company to recover the decrease of stock value by doing 'buyback' the stock from the market which mostly caused by the negative sentiment from the investors, especially during the crisis. The methodology approach of this research has use 26 sample of companies with purposive sampling method to determine 'sample criteria' on Public Listed companies listed in period of 2010 – 2014, which consistently publish their Stock Repurchase Announcement Report on the database of Indonesia Stock Exchange (IDX). Multiple regression analysis is used to conduct hypothesis test (test of assumptions) of the relationship and its influence of Undervaluation, Free Cash Flow, Leverage and Dispersion of Ownerships toward Company's Stock Repurchase. The findings show that R-Square shows the amount of 0.783 which means that all the dependant variable has significant relationship of 78.3% with its independent variables. And, on F-test also shows the significant simultaneous impact between Undervaluation, Free Cash Flow, Leverage and Dispersion of Ownerships toward Company's Stock Repurchase. And, t-test only Leverage, Dispersion of Ownerships has a partial influence toward Company's Stock Repurchase. Others, Undervaluation, Free Cash Flow shows negative value and above significant level of (α), or more than the confidence level 95%. This study can contribute in providing an overview of the factors of Undervaluation, Free Cash Flow Ownerships toward Company's Stock Repurchase in Indonesia which can be used by the investors/ potential investors to make decision making and reinforcing the best fundamental preparation on stock repurchase.
... We do not analyze trading profits around actual buyback activity. Although there is a growing literature measuring whether companies can buy back shares at discounts from market prices over short horizons (Dittmar and Field (2015), Bonaime, Hankins, and Jordan (2016) in the United States, McNally, Smith, and Barnes (2006) in Canada, Brockman and Chung (2001) in Hong Kong, and Zhang (2002) in Japan), we consider these more as tests of broker execution quality, not of the ability of managers to exploit fundamental misvaluation. One argument against using buyback authorizations (instead of completions) is that not all buybacks are completed (Stephens and Weisbach (1998)); indeed, the fact that a buyback authorization was not completed does not mean that it was a false signal or a manipulation attempt in the first place. ...
This paper documents that outside the U.S. short-term returns around share repurchase announcements are positive, although only about half the size as in the U.S. Long-run abnormal returns after buyback announcements follow the same pattern in non-U.S. firms as document by prior literature for U.S. firms extending the buyback puzzle to the global level. Cross-country differences in corporate governance quality and regulatory differences can explain variation in the short- and long-run abnormal returns. Globally, long-run abnormal returns are related to an undervaluation index (Peyer and Vermaelen, 2009, RFS) consistent with the interpretation that managers are able to time the market.
... We control for the impact of debt with Leverage, measured as the ratio of long-term debt over total assets (Jagannathan and Stephens, 2003). In addition, we control for the excess cash hypothesis (Dittmar, 2000;Brockman and Chung, 2001;Oswald and Young, 2008) with the proxy Cash, which is the ratio of net income before taxes plus depreciation and changes in deferred taxes and other deferred charges to total assets (Dittmar, 2000). 8 We also control for the impact of agency costs (Easterbrook, 1984;Jensen, 1986) with the use of Ownership Concentration (Mitchell and Dharmawan, 2007; Andriosopoulos and Hoque, 2013) measured as the ratio of closely held shares 9 over the total common shares outstanding before the repurchase announcement. ...
Open market buybacks are not firm commitments and there is limited evidence on whether firms repurchase the intended shares. We employ a comprehensive set of hand-collected data on information disclosure on open market share buyback announcements and the respective buyback trades in UK. We assess whether CEO traits can affect the buyback completion rates. We show that information disclosure is one of the major determinants of buyback completion rates. Like previous studies, we find that large and widely held firms, firms conducting subsequent buyback programmes, and firms which complete their previous programmes, have higher completion rates. Finally, we find that firms with senior CEOs, who hold external directorships and have received a business education, are more likely to complete their buyback programs. Our results suggest there is clear relationship between information disclosure, CEO traits and buyback completion rates.
... The purpose of the two-stage regression analysis is to eliminate endogenous variables affecting share repurchases and see if the fair disclosures made before and after share repurchases (DRepD) still affect the frequency of good and bad news (GN), and excess return (SRET). For the purpose of this paper, we adopt the following first stage regression analysis formula based on the methodology by Brockman and Chung (2001) and Brockman et al. (2008). ...
This paper analyzes how Regulation Fair Disclosure (Reg FD hereinafter) affects share repurchases in an emerging market where information asymmetry problem is severe. The results indicate that the frequency of bad news disclosures and the size of negative excess return in the KOSDAQ market increase in a statistically significant manner prior to share repurchase, while the frequency of good news disclosures increases after share repurchase. This is consistent with the hypothesis that firms show opportunistic behavior of buying their own stocks at a low price by taking advantage of fair disclosures. In order to analyze the cause of the opportunistic behavior, we examine variables, such as the number of stock options held by the management and the ratio of shareholding by CEO and related parties. We find empirical evidence that the stock compensation ratio for the management shows a positive relationship with good news disclosures following the completion of share repurchase. Our findings suggest that there exists information distortion in Reg FD in order to protect the management’s ownership interest in Korean stock market.
... In this case, market participants are likely to infer from the firm's equity repurchase and issuance decisions that the share price may be overvalued or undervalued and then bid the price down or up. See, for example, the evidence in Brockman and Chung (2001). More generally, a large literature documents that firms can issue (repurchase) shares only at a discount (premium) to the current price. ...
We estimate a dynamic investment model in which firms finance with equity, cash, or debt. Misvaluation affects equity values, and firms optimally issue and repurchase overvalued and undervalued shares. The funds flowing to and from these activities come from investment, dividends, or net cash. The model fits a broad set of data moments in large heterogeneous samples and across industries. Our parameter estimates imply that misvaluation induces larger changes in financial policies than investment. The investment responses are strongest for small firms but nonetheless modest. Managers' rational responses to misvaluation increase shareholder value by up to 4%. © Published by Oxford University Press on behalf of The Society for Financial Studies 2015. This work is written by US Government employees and is in the public domain in the US.
In this paper, we analyze the effects of abnormal capital investment and financial flexibility on firm performance following actual share repurchases by using a unique Taiwanese dataset. The results indicate that superior operational performance is associated with share repurchases; however, share repurchases may crowd out required capital investments. Further examination reveals that firms with adequate financial flexibility outperform firms with inadequate financial flexibility after actual share repurchases. In summary, our findings suggest that financial flexibility can mitigate the investment crowding out effect and positively affect firms' operational performance post-repurchase.
While firms cite flexibility as important when repurchasing shares, we know little about how or why firms vary repurchases. We use an extensive sample of daily repurchase transactions from the UK to investigate how the number of repurchase days and volumes of shares repurchased change based on several known motivations. We find that stock price changes, liquidity, leverage, takeover activity, and EPS targets impact share repurchasing patterns. Further, we compare actual repurchases to alternative share accumulation strategies and find that firms utilize flexibility without paying higher costs. This article is protected by copyright. All rights reserved.
Firms headquartered in more corrupt US environments (states) provide higher payouts to their shareholders. Our results are robust to, for example propensity score matching, instrumental variable approach, headquarters relocations, quasi natural experiments using exogenous shocks, use of alternative measures of corruption and payouts, use of additional (possibly omitted) variables, and various alternative explanations based on additional channels and moderating factors. Our study finds that the use and marginal value of dividend payout as a shielding channel is affected by state-level corruption. Our study also adds geographic-based shielding as another important motivation for firms to make corporate payouts.
Stock repurchase, as a corporate finance tool and a substitute for cash dividends, plays an important role in distributing excess cash. Following a prohibited period due to its potentially negative outcomes for shareholders and creditors, stock repurchase has recently been regulated within the company law systems of many jurisdictions pursuant to its increasing popularity in satisfying special financing requirements of companies.
That the regulatory improvements have removed the uncertainty inherent in such transactions has increased the volume of, especially, the open market stock repurchases. Turkish legislation, i.e. Commercial Code and Capital Markets Law, has latterly been updated in accordance with acquis communautaire in order to allow stock repurchases.
Empirical investigations regarding stock repurchase transactions of listed companies reveal that: (1) undervaluation and signaling are the most prominent determinants of stock repurchase decisions; (2) investor reaction to stock repurchases is generally positive and liquidity tends to increase as volatility decreases in the short-term.
Firms may repurchase shares to send true or false signals to the market. Since the mindset of managers is invisible, we measure it with earnings management. Discretionary accruals are used to proxy for earnings management. We show that earnings management is negatively related to the probability and frequency of share repurchase announcements. We also show that earnings management is negatively related to postannouncement 2‐year operating performance and stock returns. Our findings support the prediction that the magnitude of earnings management can serve as a reliable indicator of managers' mindsets with regard to the valuation of firms.
We study how stock option grants are funded through share repurchases under conditions of option exercisability and moneyness. Using daily repurchase disclosures by U.K. firms, we corroborate our hypothesis that driven by flexibility, firms repurchase early in an option schedule while options are out-of-money and before becoming exercisable. Our findings show that when daily stock prices are below weighted average option exercise price and when options are not immediately exercisable, firms (a) increase daily repurchase volume (value), (b) increase repurchase frequency, and (c) have lower relative repurchase prices. We further evidence this by examining the change in treasury regulation that enabled firms to hold on to repurchased shares rather than cancelling them. Our findings show a strong support for option funding motives in the post-treasury regulation period when repurchase flexibility is greater.
Essa pesquisa teve por objetivo verificar se empresas brasileiras que recompraram ações entre os periodos de 2011 a 2015, gerenciaram seus números contábeis a menor, no período que antecedeu a utilização da ferramenta de recompra, e ainda, se esse grupo de empresas obteve ganhos anormais posteriores a recompra de ações, fruto da reversão dos accruals discricionários (proxy de gerenciamento de resultados).Como metodologia de pesquisa, foram utilizados os modelos econométricos de Jones Modificado e Performance Matching para geração dos accruals discricionários. Para se encontrar o retorno anormal, calculou-se a diferença entre o retorno real (retorno do fechamento) e o retorno esperado (modelo CAPM). Os resultados da pesquisa apontaram que existem evidências de que empresas utilizam o gerenciamento de resultados para reduzir os lucros em momentos pré recompra de ações, no intuito de obter ganhos anormais nos períodos posteriores, sendo esse evidenciado por um maior retorno anormal posterior à recompra, entre empresas que supostamente gerenciaram seus números a menor, anteriormente à recompra, considerando o modelo de Performance Matching para detecção de accruals discricionários.
This paper investigates the flexibility inherent in open market share repurchases. Open market share repurchases are recognized as being flexible, since managers believe that they are not an ongoing commitment. However, I find that such returns significantly decrease upon announcing the completion of a repurchase program if firms do not concurrently announce new program authorizations. I also find that announcement returns significantly decline with completion rates and that a high completion rate acts as a negative signal, revealing that firms have finished the repurchasing activities and do not intend to continue share repurchasing in the foreseeable future. These results indicate that share repurchases are less flexible than they were previously thought to be.
Bu çalışmanın amacı hisse senedi geri alım kararını açıklayan firmaların hisse senedi getirilerinin geri alım duyurularına tepkisini ortaya koymaktır. Bu amaçla SPK’nın 21 Temmuz 2016 tarihli duyuru ile geri alımlar üzerindeki sınırlamaları kaldırmasını takiben alım kararı açıklayan 10 şirketin 17 adet geri alım duyurusu incelemeye alınmıştır. Olay çalışması yöntemi kullanılan çalışmada ±10 günlük olay penceresi belirlenmiş ve 21 gün için hisse senetlerinin beklenen getirileri hesaplanmıştır. Beklenen ve gerçekleşen getiriler arasındaki farkı ifade eden “anormal getirilerin” anlamlılığını ölçmek için t testinden yararlanılmıştır. Bulgular, hisse geri alım kararının açıklanmasından önce ve sonra, negatif ve pozitif anormal getiri elde edilmesinin mümkün olduğunu ortaya koymuştur. Ne var ki kümülatif anormal getirilerin istatistiksel olarak anlamlı olmadığı sonucuna varılmıştır.
Share repurchase programs have during the past few decades become an important way of distributing cash to shareholders since they are viewed by managers as more flexible than dividends. Open market repurchase authorizations effectively also give managers an option to repurchase shares when they view their stock as undervalued. This study exploits a data set of open market repurchases programs initiated by Finnish stock market listed companies. Finland is unique with regard to the disclosure requirements of open market repurchase programs, which enables an examination of the information content in both the initiation announcement as well as in the announcement of actual repurchases. The study covers all 293 share repurchase programs initiated between 1998 and 2013. The results show a significant positive announcement effect of about 2 percent on the initiation day. The CAAR over a five day event window is also about 1.5 percent (statistically significant). Furthermore, an additional statistically positive effect of 1.5 percent is found on the first repurchase day (about 1.1 percent over a five day event window). The positive announcement effect is larger for announcements regarding initiations of the first or the second repurchase program for a company.
We examine the influence of investor conferences on firms’ stock liquidity. We find that firms participating in conferences experience a 1.4% to 2.8% increase in stock liquidity compared to nonconference firms. Consistent with investor conferences improving firm visibility, the increase in liquidity is larger for firms with low pre-conference visibility and varies predictably with conference characteristics that affect the ability of investors to revise their beliefs about the firm. However, for firms with a large investor base and high visibility, conference participation is associated with a decline in stock liquidity, consistent with investor conferences exacerbating the information asymmetry among investors.
We examine the importance of bonus contract characteristics, specifically, with respect to the relation between EPS-based bonuses and share repurchases. We find that managers are more (less) likely to repurchase shares and spend more (less) on repurchases when as-if EPS just misses (exceeds) the bonus threshold (maximum) EPS level. We find no such relation when as-if EPS is further below the threshold. We find weak evidence that managers of firms with as-if EPS just below the EPS target are more likely to repurchase shares and spend more on repurchases relative to firms with as-if EPS just above the EPS target. We further find that the incentive-zone slopes specified in the bonus contracts are positively associated with share repurchases. Managers making bonus-motivated repurchases do so at a higher cost. Together, our results highlight the importance of compensation design in motivating managers' behavior and aligning managers' incentives with shareholders.
JEL Classifications: M41; M52.
Analiza wyników badań dotyczących działania efektu Q Tobina pozwala sformułować wniosek, że rynkowa wycena akcji (zmiany nominalne) wpływa na realne decyzje przedsiębiorstw, co oznacza, że polityka pieniężna, która za pośrednictwem działania kanału giełdowego oddziałuje na sytuację na rynkach finansowych, wpływa również dodatkowo poprzez efekt Q Tobina na decyzje przedsiębiorstw o realizacji inwestycji, fuzji, przejęć, wejściu na giełdę, emisji lub odkupie papierów wartościowych, albo zmianie struktury kapitałowej, czyli oddziałuje na kluczowe decyzje w zakresie zarządzania finansami przedsiębiorstwa. Dlatego banki centralne powinny analizować dostęp przedsiębiorstw do źródeł finansowania i uwzględniać w swych działaniach wpływ polityki pieniężnej na sytuację na rynkach finansowych, która znajduje bezpośrednie przełożenie na koszt i zdolność pozyskania kapitału przez przedsiębiorstwa, co warunkuje ich rozwój, a więc i wzrost gospodarczy oraz zatrudnienie, ale z drugiej strony jest idealną pożywką dla nierównowag finansowych.
Using a comprehensive sample of 1,830 open-market repurchases of 15 European countries encompassing the period from 1998 until 2013, we analyzed the magnitude and determinants of the share price reaction on announcement. Our results indicate that buyback announcements in Europe lead on average to a significantly positive abnormal return of 0.92% on announcement day, however, decreasing in firm size and announcement frequency. Additionally, our findings show that the market does not particularly greet the distribution of excess cash to shareholders, but rather when companies take advantage of undervalued stock as market-to-book values are inversely related to announcement returns. Looking at the companies' leverage ratios, the motive of capital structure optimization cannot be supported by the empirical findings. Lastly, with respect to managerial market timing ability we could not observe that buybacks are following a period of share price underperformance, concluding that managers are not able to time the implementation of buyback programs.
Over the past two decades or so, repurchases have become an appealing method for disbursing cash to shareholders compared to the traditional dividends. Managerial perception as well as empirical evidence suggests that repurchases are inherently more flexible than dividends, which may account for their increasing popularity. The rigidity of dividends and the apparent flexibility of share repurchases could impact firm investments. Firms may forego profitable investment opportunities to maintain their dividend levels, while repurchases could be easily scaled back to fund profitable investment projects without fear of an adverse market reaction. We test the flexibility hypothesis of repurchases by regressing capital expenditures on repurchases and dividends in addition to other control variables. Consistent with our hypotheses, we find an inverse relationship between capital expenditures and repurchases but an insignificant relationship with dividends. Further, we find that the flexibility associated with repurchases is especially evident for firms that are financially constrained, and during the recent financial crisis period when external capital constraints were severe. Finally, we find that flexibility of repurchases with respect to capital expenditures is stronger in the more recent time period during which regulatory changes made repurchases more attractive as a mechanism to disburse cash back to shareholders.
O objetivo deste trabalho é rever a legislação brasileira referente ao processo de recompra de ações, inclusive as recentes mudanças com a introdução da Instrução CVM no 299, e analisar o seu impacto sobre os acionistas minoritários. Antes dessa Instrução, as recompras de ações poderiam sinalizar um fechamento branco de capital. Nesse caso, os acionistas minoritários poderiam ser prejudicados. A pesquisa foi realizada a partir de uma amostra dos anúncios de recompra de ações realizados na BOVESPA no período entre janeiro de 1994 e junho de 2002, e confirmou-se que, em média, os acionistas minoritários tiveram um retorno acumulado de 10% durante os três meses após o anúncio da recompra das ações. Concluiu-se que, após a promulgação da Instrução CVM no 299, as ações passaram a obter retornos anormais acumulados positivos, beneficiando os acionistas.
We examine long-run firm performance following open market share repurchase announcements, 1980–1990. We find that the average abnormal four-year buy-and-hold return measured after the initial announcement is 12.1%. For ‘value’ stocks, companies more likely to be repurchasing shares because of undervaluation, the average abnormal return is 45.3%. For repurchases announced by ‘glamour’ stocks, where undervaluation is less likely to be an important motive, no positive drift in abnormal returns is observed. Thus, at least with respect to value stocks, the market errs in its initial response and appears to ignore much of the information conveyed through repurchase announcements.
Theories of corporate payout policy do not explain the observed form of distributions to shareholders. Although open-market repurchases appear to have tax advantages, cash dividends are overwhelmingly chosen. We argue that there are costs associated with open-market-repurchase programs, since they provide managers with opportunities to use inside information to benefit themselves at stockholders' expense. We offer evidence suggesting that bid-ask spreads widen around repurchase announcements, as predicted by our analysis. Since these costs of repurchases do not arise with cash dividends, our analysis implies that repurchases do not dominate cash dividends for making distributions to shareholders.
The relation between theorized components of the bid-ask spread and trade size for a sample of NYSE firms is examined. We
find that the adverse selection component increases uniformly with trade size. Conversely, order processing costs decrease
with increases in trade size for all but the largest trades. We find that order persistence decreases with trade size. The
adverse selection component is highest at the beginning of the day and lowest at the end of the day for all but the largest
trades. Trades of NYSE firms executed on regional exchanges or NASDAQ contain a large order processing cost component but
no significant adverse information effect.
During the 1980s, U.S. firms announcing stock repurchases earned favorable long-run returns. Recently, concerns have been raised over the robustness of these findings. This concern comes at a time of explosive growth in repurchase programs. Thus, we study new evidence from the 1990s for 1,060 Canadian repurchase programs. Moreover, because of Canadian law, we can carefully track repurchase activity monthly. Similarly to the situation in the United States, the Canadian stock market discounts the information in repurchase announcements, particularly for value stocks. Completion rates in Canada are sensitive to mispricing. Trades also appear linked to price movements; managers buy more shares when prices fall. Copyright The American Finance Association 2000.
This paper provides an alternative test of Amihud and Mendelson's (1986, Journal of Financial Economics, 8, 31–35) model using the turnover rate (number of shares traded as a fraction of the number of shares outstanding) as a proxy for liquidity. The evidence suggests that liquidity plays a significant role in explaining the cross-sectional variation in stock returns. This effect persists after controlling for the well known determinants of stock returns like the firm-size, book-to-market ratio and the firm beta. Unlike Eleswarapu and Reinganum (1993, Journal of Financial Economics, 34, 373–386), this paper finds that the liquidity effect is not restricted to the month of January alone and is prevalent throughout the year. The evidence supports Amihud and Mendelson's (1986) notion of liquidity premium and establishes its role in the overall cross section of stock returns.
This paper investigates the effect of trade size on security prices. We show that trade size introduces an adverse selection problem into security trading because, given that they wish to trade, informed traders perfer to trade larger amounts at any given price. As a result, market makers' pricing strategies must also depend on trade size, with large trades being made at less favorable prices. Our model provides one explanation for the price effect of block trades and demonstrates that both the size and the sequence of trades matter in determining the price-trade size relationship.
This paper studies the effect of the bid-ask spread on asset pricing. We analyze a model in which investors with different expected holding periods trade assets with different relative spreads. The resulting testable hypothesis is that market-observed expexted return is an increasing and concave function of the spread. We test this hypothesis, and the empirical results are consistent with the predictions of the model.
Introduction, 33. — The definition and measurement of transaction cost on the New York stock exchange, 35. — The determination
of the ask-bid spread, 40. — The determination of the transaction rate, 45. — Statistical results, 46. — Summary and comments,
50. — Appendix I, 52. — Appendix II, 53.
We investigate the role of limit orders in the liquidity provision in a pure order-driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit-order traders who enter the market and place orders when liquidity is needed.
We study the impact of barriers to international capital flows with stock price data from 11 countries whose stock markets feature shares restricted to locals and otherwise identical shares available to foreigners. Large price premiums for unrestricted shares relative to matching restricted shares are typically observed. Although basic notions of international asset pricing offer a straightforward explanation for the price premiums, we find little evidence that the price premiums are explained by lower foreign required returns. Alternative concepts and theories centering on foreign investor demand and the supply of shares explain some of the time-series and cross-sectional variation of price premiums. More specifically, premiums for unrestricted shares are positively correlated with foreign investor demand in the form of international mutual fund flows, sentiment implicit in matching closed-end country fund premiums, market liquidity, and information reflected in press coverage, country credit rating, and firm size.
The purpose of this study is to extend the bid-ask spread decomposition literature into the order-driven environment. The use of electronic limit order books combined with order-driven market making has been increasing rapidly in recent years because improvements in information technology and financial market deregulation. To date, reported bid-ask spread decompositions rely almost exclusively on quote-driven or hybrid systems. This study provides bid-ask spread component estimates from one of the world's largest order-driven markets, the Stock Exchange of Hong Kong. Based on a sample of over six million observations, we estimate a median adverse selection component of 33 percent and a median order processing component of 45 percent of the spread. Dollar volume-based decile portfolios show significant cross-sectional variation for adverse selection costs but insignificant variation for order processing costs. Finally, order persistence is consistently positive for all deciles and displays a direct relation with the level of trading activity.
Microstructure theory contends that dealers' bid-ask spreads should vary intertemporally with changes in the asymmetric information component of the spread. Corporate theory suggests that stock repurchase announcements signal management's private information to the securities markets. An examination of dealers' spread behavior around firms' open market repurchases in the NASDAQ market reveals a decline in spreads adjusted for dealers' inventory-holding and order-processing costs. This decline is attributed to a reduction in informed trading risk associated with the open market repurchase announcements.
The proportion of U.S. firms paying dividends drops sharply during the 1980s and 1990s. Among NYSE, AMEX, and Nasdaq firms, the proportion of dividend payers falls from 66.5% in 1978 to only 20.8% in 1999. The decline is due in part to an avalanche of new listings that tilts the population of publicly traded firms toward small firms with low profitability and strong growth opportunities—the timeworn characteristics of firms that typically do not pay dividends. But this is not the whole story. The authors' more striking finding is that, no matter what their characteristics, firms in general have become less likely to pay dividends.
The authors use two different methods to disentangle the effects of changing firm characteristics and changing propensity to pay on the percent of dividend payers. They find that, of the total decline in the proportion of dividend payers since 1978, roughly one-third is due to the changing characteristics of publicly traded firms and two-thirds is due to a reduced propensity to pay dividends. This lower propensity to pay is quite general—dividends have become less common among even large, profitable firms.
Share repurchases jump in the 1980s, and the authors investigate whether repurchases contribute to the declining incidence of dividend payments. It turns out that repurchases are mainly the province of dividend payers, thus leaving the decline in the percent of payers largely unexplained. Instead, the primary effect of repurchases is to increase the already high payouts of cash dividend payers.
Theories of asset pricing suggest that the amortized cost of the spread is relevant to investors' required returns. The amortized spread measures the spread's cost over investors' holding periods and is approximately equal to the spread times share turnover. We examine amortized spreads for Amex and NYSE stocks over the period 1983–1992. We find that stocks with similar spreads can have vastly different share turnover, and thus, a stock's amortized spread cannot be predicted reliably by its spread alone. Consistent with theories of transaction costs, we find stronger evidence that amortized spreads are priced than we find for unamortized spreads.
The purpose of this study is to investigate inter-temporal and cross-sectional depth patterns in an electronic, order-driven environment. Although many exchanges operate in this environment, little is known about the liquidity dynamics induced by such trading mechanisms. The findings, based on over six million observations, reveal an inverted U-shaped pattern that mirrors the commonly reported U-shaped spread pattern. An important implication is that earlier spread results understate the strength of inter-temporal liquidity variations. Cross-sectional analysis, based on adverse selection-sorted portfolios, demonstrates that corporate depth is negatively related to information asymmetry. The adverse selection impact on liquidity and cost of capital is stronger than previously believed since information costs are realized through both spreads and depths.
In this paper we develop a CAPM-based model to demonstrate that the true measure of systematic risk – when considering liquidity costs – is based on net (after bid–ask spread) returns. We further examine the relationship between the expected return and the future spread cost within the CAPM framework. This positive relationship in our model is found to be convex. This finding differs from Amihud and Mendelson's (1986) concave relationship, but it agrees with empirical evidence obtained by Brennan and Subrahmanyam (1996).
We examine the temporal behavior of the spread and depth for common stocks listed on the Stock Exchange of Hong Kong (SEHK), which operates as a purely order-driven mechanism. We find U-shaped intraday and intraweek patterns in the spread and reverse U-shaped patterns in the depth. Our finding is consistent with that of the study of Lee et al. (1993) [Lee, C.M.C., Mucklow, B., and Ready, M.J., 1993, Spreads, depths, and the impact of earnings information: an intraday analysis, Review of Financial Studies 6, 345–374] of New York Stock Exchange (NYSE) stocks that wide spreads are associated with small depths and narrow spreads are associated with large depths. The negative association between spread and depth on the SEHK implies that limit order traders actively manage both price and quantity dimensions of liquidity by adjusting the spread and depth. Further, larger spreads and narrower depths around the market open and close indicate a trading strategy by limit order traders to avoid possible losses from trading with informed traders when the adverse selection problem is severe. The paper provides further evidence that U-shaped spread and reverse U-shaped depth patterns should not be solely attributed to specialist market making activities.
This study investigates the anomalous findings of the previous insider trading studies that any investor can earn abnormal profits by reading the Official Summary. Availability of abnormal profits to insiders, availability of abnormal profits to outsiders who imitate insiders, determinants of insiders' predictive ability, and effect of insider trading on costs of trading for other investors are examined by using approximately 60,000 insider sale and purchase transactions from 1975 to 1981. Implications for market efficiency and evaluation of abnormal profits to active trading strategies are discussed.
The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity. The serial correlation of transaction price differences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus what the uninformed anticipate losing to the insiders.
Models of price formation in securities markets suggest that privately informed investors create significant illiquidity costs for uninformed investors, implying that the required rates of return should be higher for securities that are relatively illiquid. We investigate the empirical relation between monthly stock returns and measures of illiquity obtained from intraday data. We find a significant relation between required rates of return and these measures after adjusting for the Fama and French risk factors, and also after accounting for the effects of the stock price level.
In this paper I study the price formation process on the Stock Exchange of Hong Kong (SEHK). The estimation results reveal that the information effect is more important than the inventory effect in explaining the transaction price movement. The cross-sectional variation in market depth is positively related to the stocks’ market capitalization, turnover rate, trading price, and trading noise. The price impact displays a U-shaped pattern over the trading day, which is in contrast to the downward sloping pattern discovered on the NYSE. Such differences seem to be caused by the variation in average trade size between the two markets.
Before the tax-law changes of 1986, common stock repurchases received favorable tax treatment relative to cash dividends, yet more than 80% of the New York Stock Exchange-listed firms did not use repurchases for distributing value to their stockholders. Prior research suggests a possible resolution of the puzzle by examining the effect of open market repurchases on the liquidity of the firms' stocks. The liquidity of the stock as measured by bid-ask spread may be affected by stock repurchases in any one or all of the following ways. First, when management undertakes to reacquire the firm's shares in the open market they are, in effect, competing with the market makers of the stock. This open market repurchase activity, in the absence of information asymmetry, should result in greater liquidity or lower bid-ask spread. Second, a direct consequence of open market repurchase announcements may be increased trading in the secondary market. Increased trading volume makes it easier for the market maker to reverse his position in the stock. Therefore, the inventory holding cost component of bid-ask spread should decline upon announcements of open market repurchases. A decline in the bid-ask spread would be consistent with this explanation. Third, prior research suggests that open market repurchase announcements are associated with increased trading by informed traders in the secondary market for the firm's stock. Informed traders trade with market makers only at favorable prices. Hence, the adverse selection component of the bid-ask spread should increase in the post-announcement period. This information-asymmetry- based explanation predicts increased bid-ask spreads following announcements of open market repurchases. However, it should be noted that an asymmetric-information-based explanation does not necessarily imply that other market participants face the informed traders in all trades at all times. Specifically, the likelihood of trading with an informed trader is grea
We examine whether specialist depth quotes are related to the adverse-selection and inventory-holding cost components of the spread. Consistent with theory that predicts an inverse relation between depths and informed trading risk, we find that depth quotes are strongly inversely related to the adverse-selection component of the spread. We also find that depth quotes are inversely related to the inventory-holding-cost component, though this relation is weaker than the relation between depths and adverse selection. Our evidence suggests cross-sectional variation in depths is driven primarily by variation in informed trading risk, as proxied for by the adverse-selection component, rather than by inventory concerns.
In this paper I examine the behavior of bid and ask spreads and depths around announcements of open market stock repurchase programs. For a sample of 195 announcements from 1988 to 1990, I find statistically significant evidence of a small decline in spreads and no evidence of a shift in depths following the announcement date. Results are similar for a subsample of firms experiencing post-announcement declines in the number of shares outstanding. I conclude that open market repurchase programs as used recently do not adversely affect market liquidity.
We discuss the following problem given a random sample X = (X
1, X
2,…, X
n) from an unknown probability distribution F, estimate the sampling distribution of some prespecified random variable R(X, F), on the basis of the observed data x. (Standard jackknife theory gives an approximate mean and variance in the case R(X, F) = \(\theta \left( {\hat F} \right) - \theta \left( F \right)\), θ some parameter of interest.) A general method, called the “bootstrap”, is introduced, and shown to work satisfactorily on a variety of estimation problems. The jackknife is shown to be a linear approximation method for the bootstrap. The exposition proceeds by a series of examples: variance of the sample median, error rates in a linear discriminant analysis, ratio estimation, estimating regression parameters, etc.
I. Introduction, 79. — II. Inventory management and supply of liquidity, 80. —III. Empirical findings, 87. — IV. Conclusions,
93.
A simple time-series market microstructure model is constructed within which existing models of spread components are reconciled.
We show that existing models fail to decompose the spread into all its components. Two alternative extensions of the simple
model are developed to identify all the components of the spread and to estimate the spread at which trades occur. The empirical
results support the presence of a large order processing component and smaller, albeit significant, adverse selection and
inventory components. The spread components differ significantly according to trade size and are also sensitive to assumptions
about the relation between orders and trades.
Before the tax-law changes of 1986, common stock repurchases received favorable tax treatment relative to cash dividends, yet more than 80% of the New York Stock Exchange-listed firms did not use repurchases for distributing value to their stockholders. Prior research suggests a possible resolution of the puzzle by examining the effect of open market repurchases on the liquidity of the firms' stocks. The liquidity of the stock as measured by bid-ask spread may be affected by stock repurchases in any one or all of the following ways. First, when management undertakes to reacquire the firm's shares in the open market they are, in effect, competing with the market makers of the stock. This open market repurchase activity, in the absence of information asymmetry, should result in greater liquidity or lower bid-ask spread. Second, a direct consequence of open market repurchase announcements may be increased trading in the secondary market. Increased trading volume makes it easier for the market maker to reverse his position in the stock. Therefore, the inventory holding cost component of bid-ask spread should decline upon announcements of open market repurchases. A decline in the bid-ask spread would be consistent with this explanation. Third, prior research suggests that open market repurchase announcements are associated with increased trading by informed traders in the secondary market for the firm's stock. Informed traders trade with market makers only at favorable prices. Hence, the adverse selection component of the bid-ask spread should increase in the post-announcement period. This information-asymmetry- based explanation predicts increased bid-ask spreads following announcements of open market repurchases. However, it should be noted that an asymmetric-information-based explanation does not necessarily imply that other market participants face the informed traders in all trades at all times. Specifically, the likelihood of trading with an informed trader is greater when stock prices are lower rather than higher. Also, repurchases only involve buying and not selling by informed traders. Hence, the risk of trading against the informed trader is much less.
Unlike Dutch auction repurchases and tender offers, open-market repurchase programs do not precommit firms to acquire a specified number of shares. In a sample of 450 programs from 1981 to 1990, firms on average acquire 74 to 82 percent of the shares announced as repurchase targets within three years of the repurchase announcement. We find that share repurchases are negatively related to prior stock price performance, suggesting that firms increase their purchasing depending on its degree of perceived undervaluation. In addition, repurchases are positively related to levels of cash flow, which is consistent with liquidity arguments. Copyright The American Finance Association 1998.
THIS PAPER presents the results of an analysis of the price of marketability services on the Toronto Stock Exchange (TSE) and compares them with previously published findings concerning the price of marketability on the New York Stock Exchange (NYSE) and the U.S. over-the-counter market (OTC). More specifically, the paper examines the determinants of bid-ask spreads on the TSE and their behavior relative to spreads in the NYSE and OTC markets. In the next section, we present some background concerning the methods of market making employed in the TSE, NYSE and OTC and discuss several tentative, working hypotheses concerning the determinants of bid-ask spreads. In Section III, the discussion turns to the empirical analysis of spreads on the TSE. This is followed in Section IV by a comparison of previously published results from the NYSE and OTC markets. Finally, in Section V some implications of the analysis are discussed. In brief, we will argue that the comparative results support the conclusion that the price of marketability services is higher in the TSE than in either the NYSE or OTC market. In this context, the word "higher" does not simply imply that spreads on the TSE are absolutely wider, but rather that they are wider holding factors that influence spreads constant from market to market. The question of the relative merits of various methods of organizing trading in common stocks is receiving considerable attention in the U.S. at the present time and promises to be a topic of debate for some time to come.' Unfortu
This paper develops and implements a technique for estimating a model of the bid/ask spread. The spread is decomposed into two components, one due to asymmetric information and one due to inventory costs, specialist monopoly power, and clearing costs. The model is estimated using NYSE common stock transaction prices in the period 1981–1983. Cross-sectional regression analysis is then used to relate time-series estimated spread components to other stock characteristics. The results cannot reject the hypothesis that significant amounts of NYSE common stock spreads are due to asymmetric information.
The purpose of this study is to investigate inter- and intra-day liquidity patterns in the Hong Kong equity market. The market making system of the Stock Exchange of Hong Kong (SEHK) is highly transparent and operates with minimal third party intervention. Liquidity is supplied solely by the submission of public limit orders through a fully-automated, order-driven trading system. The results reveal bid-ask spread patterns on the SEHK more similar to those of specialist systems than to those of multi-dealer systems, thereby providing useful evidence in distinguishing among competing market microstructure theories.
This paper examines the effect of recent market reforms on the competitive structure of the Nasdaq. Our results show that changes in inventory and information costs cannot explain the post-reform decrease in bid-ask spreads. We interpret this as evidence that the reforms have reduced Nasdaq dealers' rents. Additionally, we find that the difference between NYSE and Nasdaq spreads have been greatly diminished with the new rules. Further, the reforms have resulted in an exit, "ceteris paribus", from the industry for market making. Overall, our results provide strong evidence that the reforms have improved competition on the Nasdaq. Copyright The American Finance Association 2000.
This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
This paper studies estimators that make sample analogues of population orthogonality conditions close to zero. Strong consistency and asymptotic normality of such estimators is established under the assumption that the observable variables are stationary and ergodic. Since many linear and nonlinear econometric estimators reside within the class of estimators studied in this paper, a convenient summary of the large sample properties of these estimators, including some whose large sample properties have not heretofore been discussed, is provided.
We show that repurchases have not only became an important form of payout for U.S. corporations, but also that firms finance their share repurchases with funds that otherwise would have been used to increase dividends. We find that young firms have a higher propensity to pay cash through repurchases than they did in the past and that repurchases have become the preferred form of initiating a cash payout. Although large, established firms have generally not cut their dividends, they also show a higher propensity to pay out cash through repurchases. These findings indicate that firms have gradually substituted repurchases for dividends. Our results also suggest that before 1983, regulatory constraints inhibited firms from aggressively repurchasing shares. Copyright The American Finance Association 2002.
AN IMPORTANT, if not critical, element in almost every financial market is the dealer who stands ready to trade for his own account and thereby provides to the public the convenience of being able to trade immediately. The dealer incurs costs of holding an inventory of securities, certain costs of handling each order and costs due to adverse information possessed by those that trade with him. He is compensated for the costs by selling at the ask price (above the "true" price) and buying at the bid price (below the "true" price).' Dealers are to be distinguished from brokers who do not bear risk and who usually charge a commission. Since healthy financial markets are viewed as critical to a healthy economy and since dealers stand at the center of many financial markets, dealers have been the focus of many regulatory inquiries and some empirical studies by academicians. Today, competitive forces (instiutional trading, third market, block trading), Justice Department pressures, and technological change (the computer) are in the process of producing major changes in the structure of securities markets. As part of this restructuring a major issue is the way in which the dealer function should be provided, the degree of competition which should exist and the rules and regulations under which individual dealers should operate.2 Using data from the Over-the-Counter Market (OTC), this paper examines two aspects of dealer behavior that have implications for appropriate structures of securities markets: 1. What factors determine the price of dealer services? An understanding of these factors may suggest how dealer costs may be minimized. 2. What determines the number of dealers willingly making a market in a stock?
An individual who chooses to serve as a market‐maker is assumed to optimize his position by setting a bid‐ask spread which maximizes the difference between expected revenues received from liquidity‐motivated traders and expected losses to information‐motivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information‐motivated trader, it is shown that the bid‐ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid‐ask spread proposed in this paper is consistent with the empirical literature.
The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined.
The Practitioner's Guide to the Listing Rules
- S Barham
- I Hallsworth
- M Jackson
Barham, S., I. Hallsworth and M. Jackson, 1998, The Practitioner's Guide to the Listing Rules,
4 th ed., Hong Kong: ISI Publications.
Safe harbor or smoke screen? SEC guidelines for executing open market repurchases, working paper
- D O Cook
- L Krigman
- J C Leach
Cook, D.O., L. Krigman and J.C. Leach, 1999b, Safe harbor or smoke screen? SEC guidelines
for executing open market repurchases, working paper, University of Colorado.