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Historically, share repurchases have been an insignificant way of redistributing cash. This is
because widespread concerns regarding repurchase-related stock price manipulation led
regulators to discourage share repurchases (Jacob & Jacob, 2013). However, over the last
three decades a great deal of regulatory reform has been introduced which has considerably
improved a firm’s ability to repurchase its own shares. In effect, share repurchases have
become increasingly common around the world (Grullon & Ikenberry, 2000). In the United
States for instance, the total value of share repurchases for US firms spiked at around USD
600Bn in 2007 compared to approximately USD 40Bn in 1990 (Zeng, 2014). This increase in
share repurchase volumes is also observed outside the US, as many countries including
Canada, France, Germany, Japan and Hong Kong introduced open market repurchases from
the 1990s onwards. In the first half of the 2000s other European countries followed by
engaging in legal reforms to simplify procedures or eradicate tax provisions related to share
repurchases. As a result, the total value of share repurchases in the European Union increased
from EUR 1Bn in 1992 to approximately EUR 58Bn in 2005 (von Eije & Megginson, 2008).
Before 2001, the number of share repurchases carried out in the Netherlands was minimal.
Due to several changes in civil law and dividend tax regulation between 2001 and 2008 a
significant growth in open market share repurchase programs was observed. Von Eije and
Megginson (2008) for instance find that following reforms, the Netherlands ranked second in
the European Union in the overall value of share repurchases in 2005.
The global increase in the total value of share repurchases reinvigorates discussion as
to whether these repurchases actually manipulate stock prices. Various studies argue that
managers primarily use share repurchases to signal the relative undervaluation of stocks (e.g.
Dann, 1983; Wansley, Lane and Sarkar, 1989; Ikenberry, Lakonishok and Vermaelen, 2000).
In opposition to this, regulators have raised renewed concerns regarding the use of share
repurchases merely as a tool to distort stock prices, undermine price efficiency and in turn
increase managements’ stock performance related compensation1. Busch and Obernberger
(2016) address the concerns regarding the distortion of share prices by investigating the
1 “Senators Think Stock Buybacks Might Be Manipulative” on Bloomberg (https://www.bloomberg.com /view/articles/2015-06-
15/senators-think-stock-buybacks-might-be-manipulative), “Warren decries stock buybacks, high CEO pay” on Boston Globe
(https://www.bostonglobe.com/news/nation/2015/06/04/sen-elizabeth-warren-decries-stock-buybacks-and-high-ceo-pay-seeks-overturnrules/
iXvsq8lGI6KOFsFY5w7FUP/story.html). Baldwin Letter to SEC on Baldwin Senate.Gov (https://www.baldwin.
senate.gov/imo/media/doc/Baldwin%20Letter%20to%20SEC%204%2023%2015.pdf), “Aandelen terugkopen, verstandig of niet?” on Delta
Lloyd Asset Management (http://www.deltalloydassetmanagement.nl/nl-nl/nieuwsberichten /2013/ 7/aandelen-terugkopen-verstandig-ofniet/)
2
potential impact of share repurchases on price efficiency in the United States. Their study’s
main result is that share repurchases make prices more efficient. Specifically, share
repurchases in the US make prices more accurate by providing price support at intrinsic
values (Busch & Obernberger, 2016).
As other stock markets are governed by different legislation and have unique tax
environments, the perceived impact on price efficiency may differ among countries. It would
therefore be interesting to examine whether Busch and Obernberger’s (2016) main finding
also holds in an international context. The Netherlands is an example of a market governed
by a different set of rules than the US and thus provides a suitable setting to examine the
external validity of Busch and Obernberger’s (2016) inferences. This thesis consequently
builds on their work by discussing the following research question in the context of the
Netherlands:
“Do share repurchases improve the informational efficiency of share prices?”
A study of open market repurchases in the Netherlands
I address this question by assessing what impact share repurchases have on price
efficiency and the information content of share prices. In particular, I postulate and test two
hypotheses originally developed by Busch & Obernberger (2016). The first hypothesis argues
that various (managerial) incentives for share repurchases increase share prices to levels
above the intrinsic value (Busch & Obernberger, 2016). When share prices deviate from
intrinsic values, noise is introduced into share prices. The introduction of noise into share
prices reduces the overall information content and price efficiency of shares. Conversely,
Busch and Obernberger (2016) argue that if firms repurchase shares at intrinsic values, share
prices converge to their intrinsic values and price efficiency improves.
The second hypothesis states that share repurchases increase either the speed or the
accuracy with which stock prices incorporate information and therefore enhance price
efficiency. According to Busch and Obernberger (2016), the intuition is that share
repurchases can only reflect positive information about a firm because it intervenes in the
market for its own shares through two distinct channels: market orders and limit orders. A
market order entails that shares are repurchased immediately at the prevailing market price. A
firm can therefore instantaneously incorporate information into its stock price by
repurchasing its own shares (Busch & Obernberger, 2016). This means that a market order
can increase the speed with which positive information is reflected in the stock price. Limit
orders on the other hand, imply that firms can increase the accuracy with which information
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is reflected in stock prices. Submitting a limit order means that a firm orders to buy its own
stock at a specific price (the limit price). Busch and Obernberger (2016) reason that a limit
order therefore provides a lower bound for a stock’s price. They argue that a repurchasing
firm can increase the accuracy of a stock price, if a limit order provides price support (or
lower bound) to reflect its intrinsic value (Busch & Obernberger, 2016). These distinct
channels provide two means by which share repurchases improve price efficiency.
To empirically test the hypotheses, I manually compile a dataset of all share
repurchases carried out in the Netherlands between the 1st of January 2008 and the 31st of
December 2016 based on the AFM register for price sensitive information. Despite being the
most comprehensive resource available for share repurchases in the Netherlands, I observe a
great deal of missing transactions. To overcome these gaps, I cross-check the AFM register,
company websites and investor relations departments as well as Bloomberg reports to obtain
the relevant transaction information. Using this procedure, I collect the complete weekly
transaction history of 68 open market repurchase programs in the Netherlands. The data I
collect includes the average price paid, the number of shares repurchased and the date on or
week within which the shares were repurchased. My sample includes 30 repurchasing firms,
491 program months and 2,713 firm months. This sample represents the first comprehensive
dataset on actual repurchases in the Netherlands to date.
I proxy price efficiency and information content by employing two groups of
measures for both price delay and idiosyncratic risk. The price delay measures are based on
the relative explanatory power of a simple market model compared to an extended market
model including 5 lags for market returns. The idea is that one observes greater price delays
in the incorporation of new information, if the extended market model has greater
explanatory power than the simple market model (Hou & Moskowitz, 2005). This price delay
decreases when share repurchases improve the speed with which information is assimilated
into share prices. The idiosyncratic risk measures quantify whether share price moves
together with the market. I use the R-squared between the simple and extended market model
as well as the absolute market correlation between stock and market returns to proxy for
idiosyncratic risk. When share prices increasingly co-move with the market the relative
amount of idiosyncratic risk declines. This implies that if share repurchase introduce noise
into share prices the idiosyncratic risk of a stock increases and the information content
declines (Busch & Obernberger, 2016).
I use the manually collected weekly repurchase transaction data to construct two
measures of repurchase activity originally theorized by Busch & Obernberger (2016). The
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first measure envelopes the monthly number of shares repurchased scaled by the total number
of shares outstanding in the previous month. The second measure approximates the remaining
number of shares that can be bought within the program scaled by the number of shares
outstanding at the beginning of the program. I furthermore incorporate firm fixed effects and
time effects to guarantee that my results are no affected by heterogeneity or macro-economic
factors (Busch & Obernberger, 2016).
I find that share repurchases decrease price delay in program months and therefore
conclude that repurchases make prices more efficient when using lagged Repurchase
Intensity as a proxy for repurchase activity. I also infer that the co-movement between shares
and the market increases upon repurchases, as evidenced by a higher R-squared and market
correlation when using lagged Repurchase Intensity. This result entails that a share’s relative
idiosyncratic risk is lower when the lagged Repurchase Intensity is higher. My evidence
therefore contradicts the idea that share repurchases introduce noise into stock returns. I
extend my analysis to learn more about the mechanism that induces the improvement in price
efficiency and the reduction of idiosyncratic risk. I sub-divide the sample into up markets
(positive market returns) and down markets (negative market returns) to constitute whether
positive or negative systematic information comes to the market in repurchase months. If the
results are strongest in the up market sub-sample, I can establish that firms actively trade in
their own shares to increase the speed by which positive information is incorporated into
share prices (Busch & Obernberger, 2016). If the results are strongest in the down market, I
can infer that firms repurchase at intrinsic value to increase the accuracy by which negative
information is incorporated into share prices. I find that the results for price efficiency and
idiosyncratic risk are strongest in down market months when negative information comes to
the market. I deduce that share repurchases predominantly increase price efficiency and
information content by providing price support at intrinsic values.
I also conduct some additional tests to identify whether subsets of repurchases based
on distinctive motivations for a repurchase program have a differential impact on price
efficiency. This analysis consists of two parts: a study of announcement returns and a study
of actual repurchase behavior. I find that firms announcing a repurchase program to alter their
capital structure or distribute excess cash experience positive abnormal returns and conclude
that information is temporarily incorporated into stock prices upon repurchase
announcements. Next, I interact a dummy for motivation with actual repurchase activity and
find that firms carrying out repurchases to adjust the capital structure increase the price
efficiency and reduce the idiosyncratic risk of their share prices. Moreover, I find that firms
5
conducting repurchases to distribute excess cash actually harm price efficiency. These
significant relationships are however only observed when using contemporaneous
Repurchase Intensity to proxy for actual repurchases. In sum, this approach reveals how
particular types of information impact price efficiency differently.
I contribute to the literature in three particular ways. First, relatively little research has
been conducted on share repurchases in the Netherlands. In fact, this thesis presents the first
study of actual repurchases in the Netherlands. Repurchase transaction data is not readily
available and must be hand-collected in the Netherlands. The final dataset therefore provides
an invaluable addition to the growing body of data concerning the Dutch financial market in
general, and share repurchases in particular. The second key contribution is that this thesis
adds to the relatively uncharted field of the impact of share repurchase activity on price
efficiency. Busch & Obernberger (2016) are the only authors to have investigated this
relationship to date. Lastly, I provide a novel approach to study share repurchase activity, by
collecting and investigating the motivation to conduct repurchases and assessing whether the
distinctive motivations impact repurchase activity and price efficiency differently.
The rest of this thesis is organized as follows. Chapter 2 presents a detailed outline of
the basics of share repurchases, a summary of the key regulations governing share
repurchases in the Netherlands as well as a review of the key strands of academic literature
concerned with share repurchases. Chapter 3 subsequently discusses the formation of two key
hypotheses, which collectively aid the investigation of the impact of share repurchases on
price efficiency. Chapter 4 next details the construction of the final dataset as well as the
methodology used in this thesis. Chapter 5 reports the empirical results and relates the
findings to previous research. Chapter 6 connects the key findings of this thesis to formulate a
conclusion. Lastly, Chapter 7 debates some of the key limitations of the method and
methodology used in this thesis as well as proposes certain recommendations for future
research.

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