The Effect of Enhanced Disclosure on Open Market Stock Repurchases

The John M. Olin Center has just posted a new paper by Michael Simkovic, an Olin Fellow in Law and Economics, entitled The Effect of Enhanced Disclosure on Stock Market Repurchases.  The paper studies the effect of the SEC’s rule requiring quarterly disclosure of shares purchased under share-repurchase programs on opportunistic use of share-repurchase announcements.  (Guest Contributor Jesse Fried also explored this issue in Informed Trading and False Signaling with Open Market Repurchases.)  The Abstract of Michael’s paper is as follows:

Publicly traded companies distribute cash to shareholders primarily in two ways–either through dividends or through anonymous repurchases of the company’s own stock on the open market.  Companies must announce a repurchase authorization, but do not actually have to repurchase any stock, and until recently did not have to disclose whether or not they were in fact repurchasing any stock.  Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them.  Scholars and regulators became concerned that such announcements might be used by insiders to exploit public investors.  To increase transparency and reduce opportunities for exploitative behavior, the SEC required that companies disclose their repurchase activity for the past quarter in the 10-Q and 10-K filings beginning in January 2004.  This paper tracks the 365 repurchase programs announced in 2004 and finds that since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement.

Commentary is especially welcome on this fascinating new piece.  The full article can be downloaded here.