The Impact of Share Repurchases on Stock Liquidity During Market Distress

Abstract: Since stock repurchases were first introduced in the late 1960 its growth has been significant. This has led to increasing interest among researchers regarding the motives behind them and their post-effects. While stock repurchase research is extensive, the focus on the effect of stock repurchases on liquidity is limited. Prior literatureon this topic has yielded inconclusive results, suggesting both an increase and decrease in liquidity after a share repurchase. Liquidity, being a vital cornerstone for financial markets to function, tends to disappear gradually during times of distress. Therefore, this study adds to existing literature on the share repurchase effect on liquidity by examining the relationship during market distress, focusing on the Covid-19 pandemic. Using detailed intraday data from the Swedish market from 2020-2021, this study aims to provide more accurate and timely insights and sets out to test the following hypothesis: Share repurchases affect liquidity during market distress. Using four different liquidity measures, we find support that it does so. For two of our liquidity regressions, we find significant results that share repurchases have a negative effect on liquidity. These findings support the information asymmetry hypothesis which implies that market makers find themselves trading with better-informed insiders resulting in increased adverse selection costs. To compensate for this extra cost, market makers increase the bid-ask spread which decreases liquidity.