Managerial Timing and Corporate Liquidity: Evidence from Actual Share Repurchases

We investigate the timing of open market share repurchases and the resultant impact on firm liquidity. Using Hong Kong’s unique disclosure environment, we identify the exact implementation dates for over 5,000 equity buybacks. We find that managers exhibit substantial timing ability. Consistent with the information-asymmetry hypothesis, bid-ask spreads widen and depths narrow during repurchase periods. We decompose bid-ask spreads and show that adverse selection costs increase substantially as market participants respond to the presence of informed managerial trading. Our findings provide additional insight into how markets process information and have significant implications for corporate payout and disclosure policies. For correspondence: Paul Brockman, Department of Accountancy, Hong Kong Polytechnic University, Hung Hom, Hong Kong; office: (852) 2766-7032, fax: (852) 2330-9845, email: [email protected] Managerial Timing and Corporate Liquidity: Evidence from Actual Share Repurchases Abstract We investigate the timing of open market share repurchases and the resultant impact on firm liquidity. Using Hong Kong’s unique disclosure environment, we identify the exact implementation dates for over 5,000 equity buybacks. We find that managers exhibit substantial timing ability. Consistent with the information-asymmetry hypothesis, bid-ask spreads widen and depths narrow during repurchase periods. We decompose bid-ask spreads and show that adverse selection costs increase substantially as market participants respond to the presence of informed managerial trading. Our findings provide additional insight into how markets process information and have significant implications for corporate payout and disclosure policies.We investigate the timing of open market share repurchases and the resultant impact on firm liquidity. Using Hong Kong’s unique disclosure environment, we identify the exact implementation dates for over 5,000 equity buybacks. We find that managers exhibit substantial timing ability. Consistent with the information-asymmetry hypothesis, bid-ask spreads widen and depths narrow during repurchase periods. We decompose bid-ask spreads and show that adverse selection costs increase substantially as market participants respond to the presence of informed managerial trading. Our findings provide additional insight into how markets process information and have significant implications for corporate payout and disclosure policies.