Firms as Buyers of Last Resort
Coauthor(s): Harrison Hong, Jiang Wang.
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We develop a model to explore the asset pricing implications of firms being buyers of last resort for their own stocks. Those with more ability to repurchase shares when prices drop far below fundamental value (i.e., less financially constrained firms) should have lower short-horizon return variances (controlling for fundamental variance) than other firms. Using standard proxies for financing constraints such as past repurchases and firm age, we find strong support for this predicted relation. We also find that this relation is stronger in the U.S. after 1982 when regulatory reforms lowered the legal cost of conducting repurchases as well as in countries where share repurchases are legally easier to execute.
Source: Journal of Financial Economics
Hong, Harrison, Jiang Wang, and Jialin Yu. "Firms as Buyers of Last Resort." Journal of Financial Economics 88 (April 2008): 119-145.