Essays on Share Repurchases

This dissertation has three essays. In the first essay, I investigate whether the decision to repurchase stock is driven by investor demand for repurchases. Specifically, I hypothesize that firms cater to investor demand for repurchases by initiating repurchases when investors place premiums on the stock prices of repurchasing firms. I propose proxies (analogous to Baker and Wurgler (2004)) that measure the repurchase premium. I find that the lagged repurchase premium is positively and significantly related to repurchase initiation and continuation decisions, even after controlling for tax effects, year trends and alternate investment opportunities. I find that a greater fraction of dividend paying firms also repurchase stock when the repurchase premium has been high. The fraction of dividend payers that repurchase stock is found to be negatively related to the lagged dividend premium, establishing the competing attractiveness of dividends and repurchases based on the respective dividend and repurchase premium. Firms are more likely to repurchase stock when the repurchase premium is high and the difference between the repurchase and dividend premium is positive. The second essay looks at a relatively new way of buying back shares, called Accelerated Share Repurchases (ASRs). ASRs are credible commitments by firms to repurchase shares immediately. Including an ASR in a repurchase program reduces the flexibility that firms have to alter an announced program in response to subsequent changes in the price and liquidity of its stock, unexpected shocks to cash flow and/or investment, etc. We investigate whether firms decisions to include ASRs in their repurchase programs are associated with factors expected to influence the costs of lost flexibility and the benefits of enhanced credibility and immediacy. The third essay looks at stock market trading characteristics around ASR announcements. I find that the trading costs decrease following an ASR announcement. On average, market quality improves; trading volume increases; and trade size increases following an ASR announcement. The information asymmetry component of spread also increases post ASR.