ABSTRACT

Tomperi, Ilkka Keijo Johannes (2004). Liquidity Effects, Timing and Reasons for Open-Market Share Repurchases. Acta Wasaensia No. 133, 176 p.

This study focuses on the liquidity effects, timing and reasons for open-market share repurchases. Share repurchases are a flexible payout alternative to cash dividends. The first part of the thesis focuses on the timing of share repurchases and studies the managerial timing ability. The second part focuses on the liquidity effects of share repurchases studying changes in bid-ask spread and trading volume around buyback trades. Finally the third part focuses on the total payout of companies in order to identify trends between cash dividends and stock repurchases. The overall data covers all stock repurchase programmes of Finnish firms traded on the Helsinki Stock Exchange in 1998–2002. This study provides empirical findings on the timing and liquidity effects of buybacks in a fully automated limit order-book market benefiting from the daily disclosure requirements. The Finnish tax regime offers a data set to study the development of total payout of companies in an environment where the double taxation of dividends is prevented in the case of a domestic shareholder. The empirical results suggest that companies do have timing ability in repurchases but not on a daily basis because of the fixed repurchase plan, according to which a stockbroker executes actual repurchases. Major share price drops increase repurchase activity giving support on the hypothesis that managers are interested in supporting their share price during periods of major changes in market valuations. On average, companies pay less for the shares acquired than a naïve accumulation strategy would result. Further, less liquid companies’ repurchases have beneficial liquidity effects when measured with bid-ask spread and trading volume, supporting the market maker hypothesis of Barclay and Smith (1988). A new relative repurchase measure provides additional evidence on repurchases beneficial effects on liquidity. According to the results, foreign ownership, stock option plans, and level of free cash flow have a positive effect on the share of repurchases of total payout. The results further support that the adoption of repurchases increases the total payout of firms, a finding consistent with recent US data.

Ilkka Tomperi, Department of Accounting and Finance, Graduate School of Finance and Financial Accounting, University of Vaasa, Wolffintie 34, FIN-65101 Vaasa, Finland.

Key words: share repurchases, dividends, liquidity, bid-ask spread