How Does Stock Market Liquidity Affect the Willingness to Repurchase?

Abstract: In this paper we investigate what impact liquidity has on the propensity to repurchase equity. We suggest there is a negative impact of increased liquidity on management's propensity to repurchase. Using decimalisation as an exogenous liquidity shock, we analyse open market repurchase announcements for all stocks in the CRSP database between 1993 and 2013. Using decimalisation as (1) a liquidity proxy in a difference-in-difference OLS regression and (2) as an instrument for the Amihud and FHT liquidity proxies in a 2SLS regression, we find the impact to be negative, contradicting the findings of previous research. Our results are robust to excluding the potential impact of the global financial crisis in 2008. However, controlling for prior level of liquidity, we get results indicating that we cannot reject that firms with different prior liquidity levels react differently on liquidity improvements.