Odd-Lot Repurchase Programmes: An Analysis (2008)

We examine the effects of odd-lot buy back programs on liquidity of stocks of the repurchasing firms and the success of the programs. Using a sample of the odd-lot programs implemented by NYSE, Amex and Nasdaq listed firms during 1985 to 2000, we find that while the trading volume increases during one-month period after the programs, it does not change significantly during the six-month period. The average bid-ask spreads over both one- and six-month periods do not decline but increase. These findings do not support the notion that reducing number of odd-lot holders enhances liquidity. However, we find that the firms are successful in reducing number of shareholders through the programs. The numbers of total and individual shareholders decline significantly. The reduction in number of shareholders results in administrative cost savings for the firms. Further, we find that the announcements have no significant impact on the firms' stock prices. 1. Introduction Many prior studies that examine stock repurchases have excluded buy backs of fewer than 100 shares from their samples. These studies implicitly assume that odd-lot repurchases have no significant impacts on liquidity of the stocks and/or stock market's reactions. However, the odd-lot repurchases might result in an increase in trading volume. This is because during the repurchase programs, shares are bought from oddlotters who usually hold the shares due to high transaction costs, bundled, and sold in open markets. This increases the number of shares circulating in the secondary markets. An increase in the trading volume should reduce inventory costs for market makers and hence bidask spreads should decline. The odd-lot repurchases are also likely to reduce number of oddlotters who consume majority of shareholders' servicing costs. Therefore, the programs save the administrative expenses for the firms. The cost savings should result in positive reactions from stock markets. In this paper, we investigate the impacts of odd-lot stock repurchase programs on liquidity of stocks of the repurchasing firms, and the success of the programs. The odd-lot repurchase programs are important because odd-lot shareholders comprise more than 50 percent of all shareholders' accounts. Since the securities and Exchange Commission eased rules on buy backs from small shareholders in 1983, the programs have gained popularity. Since then, the number of odd-lot programs has grown 15 percent per year.3 We examine 204 initial odd-lot repurchase programs announced by 182 firms during 1985-2000. We find that the average daily trading volume increases during the onemonth period following the programs. However, the trading volume during the six-month period after the programs does not change significantly. Subsequent to the end of the programs, bid-ask spreads do not decline but increase significantly over both one- and six-month periods. These findings do not suggest that the programs enhance liquidity. The return volatility during one- and six-month periods also increases. However, we find that both numbers of total and individual shareholders decline significantly after the repurchase programs. This finding suggests that small shareholders take advantage of lowered trading costs. Further, we find that the odd-lot repurchase announcements have no effects on shareholders' wealth. The median three-day announcement period abnormal return of the firms is not significantly different from zero. The returns of the firms with relatively high number of individual shareholders, which are expected to benefit more from the announcements, are not different from those of firms with a lower number of shareholders. Our findings support the implicit assumptions of many prior studies that examine regular repurchases that odd-lot stock repurchases have only marginal impacts on liquidity and the market reactions. The remainder of this paper is organized as follows. …