Share Repurchase Offers and Liquidity: An Examination of Temporary and Permanent Effects

Open-market repurchase programs do not allow for precise estimates of share buy-back intensity to measure liquidity effects. To circumvent the uncertainty surrounding the quantity and timing of shares truly acquired in repurchase programs and to measure their long-term impact, we examine Dutch auctions and fixed-price tender offers. We investigate both the temporary and permanent liquidity effects of share repurchase programs andfind that the improvement in liquidity is tran sitory and limited to the tender period when the firm s offer to repurchase shares is outstanding. Improvements in liquidity over longer intervals appear to be the result of an overall price im provement and a reduction in volatility rather than the result of structural change in market dynamics. Share repurchase programs have taken on an increased importance in recent years. Firms can repurchase shares through an open-market repurchase, targeted share repurchase, fixed-price tender offer, or Dutch auction tender offer. In this paper, we examine the short- and long-term effects of firms' self-tender (stock buy-back) programs on the liquidity of the underlying shares. We believe that the long-term liquidity effects cannot be fully explored in an "open-market share repurchase programs" setting because there is no finite date for the conclusion of such programs. If there is no program expiration date, then the researcher cannot determine the precise periods over which to construct the liquidity variables necessary for the empirical analyses. Additionally, firms that conduct open-market repurchase programs are under no obligation to disclose when, or even if, they repurchase shares. Furthermore, open-market share repurchase programs are often renewed and can span several years. The indefinite time horizon impedes the researcher's ability to measure the long-term impact of share repurchase programs on firm liquidity. To overcome these difficulties, we examine repurchases using the Dutch auction (DA) and fixed-price tender offer (FPTO) formats. These share repurchase formats have two advantages. First, the timing, quantity, and price of shares acquired for DA/FPTO repurchases are known because they are announced in company press releases. Second, these repurchases occur over a relatively short period, typically 30 days. We prefer this shorter time period, since it minimizes the probability of a large-scale structural change (other than the repurchase per se) or some other The authors thank Nick Dorsey and Sandeep Tanejafor excellent research assistance. Zebedee gratefully acknowledges the financial support of San Diego States Research, Scholarship, and Creative Activity Program. Nay or is grateful for financial support from the Hans Julius B?r Chair. The comments of an anonymous referee and of Anne-Marie Anderson, William Christie, Srini Krishnamurthy, C.N.V. Krishnan, Ji-Chai Lin, and participants in presentations at the Securities and Exchanges Commission (SEC), Asian Finance Association (Kuala Lumpur), the Copenhagen Business School, and the FMA Conference helped to significantly improve the analysis in the paper. We remain responsible for all errors.