Information trading around open market share repurchases: evidence from the Taiwan Stock Exchange

Abstract

We examine the information trading around open market share repurchases on the Taiwan Stock Exchange (TSE). Because of the distinctive regulations of share repurchases in Taiwan, our samples offer a unique opportunity to test changes in information trading during share repurchases. We show that the risk of information trading significantly increases during the repurchase execution period and reverts back in the post-expiration period. It is likely that some uninformed traders leave the market in the execution period, in anticipation of higher information uncertainties. Therefore, the remaining uninformed traders collectively face higher possibility of trading with informed traders.

Notes

¹Alternatively, as share repurchase announcements release information, they may attract more investors to analyse the firm and hence reduce the information asymmetry. Nevertheless, information tends to be short-lived. Informed traders might be eager to take advantage of their private information during share repurchases and hence increase the information asymmetry on the market. In addition, strategic uninformed traders might temporarily leave the market anticipating news events and hence the overall information asymmetry is increased. It thus seems that changes in information asymmetry during share repurchases are a dynamic process. Thus, whether share repurchases would increase or decrease the overall information asymmetry on the market is an empirical question, which we will examine in later sections by decomposing the bid and ask spreads.

²Ahn et al. (2001) find that the abnormal imbalance of trade for share repurchase tender offer can last for about 5 days. For studies of stock split, Maloney and Mulherin (1992) find that the abnormal trading increases prior to the split announcement, and Conrad and Conroy (1994) show that the abnormal imbalance of trades can last for several days after the ex-date.

³There are 82% sample firm-events with at least 40 trading days in the execution period. The length of estimation period is similar to those in the literature and the model estimates should have the necessary reliability.

⁴For the ATT rule, if the current transaction price is higher than the previous price, then the current transaction is buyer-initiated and the trade direction is positive. If the current transaction price is lower than the previous price, then the current transaction is seller-initiated and the trade direction is negative. If the current transaction price is equal to the previous price, then the trade transaction direction is determined by the best bid and the best ask. If the transaction price is higher than the average of the best bid and the best ask, the trade direction is negative. If the transaction price is lower than the average of the best bid and the best ask, the trade direction is positive. If the transaction price is equal to the average of the best bid and the best ask, we cannot define the trade direction.

⁵We also calculate the abnormal turnover by the market model with the estimation window from day −120 to day −51 of the share repurchase announcement and find similar results.