2003-01 FIN: Does Supply Curve Inelasticity Explain Abnormal Long-Run Returns Following Open Market Share Repurchases? (Working Paper)
McNally, W., Smith, B.F., & Barnes, T.
published: 2003 | Research publication | Working Paper - Finance
ABSTRACT This paper uses a new database that provides details on individual repurchase trades. We estimate that repurchase trades earn significant long-run abnormal returns. We partly attribute the returns to the fact that open market repurchases permanently remove supply from the market. In the presence of supply curve inelasticity this leads to an increase in the equilibrium price of the stock. Consistent with this argument, we find that individual repurchase trades have a significantly greater permanent price impact than matched ordinary trades. We also show that firms exploit their insider information by buying on dips and at a discount to the prices paid by outside investors. The public announcement of the trades does not signal information to the market.
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revised Dec 1/04
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