Simkovic Additionr.docSimkovic_8.pdfSimkovic fellows cover.docRepurchases Paper--False Signaling Only (2).docI. IntroductionII. Background on RepurchasesA. Growing Use of Repurchases as Substitutes for DividendsB. Possible Benefits of Repurchases to Shareholders/Investors1. Tax Advantages of OMRs over Dividends2. Distribution Costs: OMRs vs. Dividends3. OMRs and Employee Stock Option Plans4. LiquidityC. Possible Harm to Investors: False Signaling and Bargain RepurchasesD. Regulation1. Insider Trading and Rule 10b-52. Stock Manipulation and the 10b-18 Safe Harbor3. DisclosureIII. Methods, Results & DiscussionA. Sample and DataB. Descriptive StatisticsC. Measuring Repurchase Program Completion: Shares vs. DollarsD. Results and Comparison with Previous Studies1. The Disclosure rule decreased the proportion of firms that failed to complete their announced repurchases2. Response to Possible Critiques3. Other measures of repurchase completion4. Difficulty of Estimating Repurchases Before the Disclosure RuleIV. Conclusion ISSN1936‐5349(print) ISSN1936‐5357(online)HARVARDJOHNM.OLINCENTERFORLAW,ECONOMICS,ANDBUSINESSFELLOWS’DISCUSSIONPAPERSERIESTHE EFFECT OF ENHANCED DISCLOSURE ON OPEN MARKET STOCK REPURCHASES Michael Simkovic Discussion Paper No. 8 3/2007 Harvard Law School Cambridge, MA 02138 Contributors to this series are John M. Olin Fellows in Law and Economics at Harvard Law School or other students who have written outstanding papers in law and economics. This paper can be downloaded without charge from: The Harvard John M. Olin Fellow’s Discussion Paper Series: http://www.law.harvard.edu/programs/olin_center/JELClassification:G1,G3,G14,G18,G35,G38THEEFFECTOFENHANCEDDISCLOSUREONOPENMARKETSTOCKREPURCHASES MichaelSimkovic* ABSTRACT Publicly traded companies distribute cash to shareholders primarily in two ways--either through dividends or through anonymous repurchases of the companies’ 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 exploitive behavior, the SEC required that companies disclose their repurchase activity for the past quarter in their 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. *MichaelSimkovicisaJohnM.OlinFellowinLawandEconomicsatHarvardLawSchool.HethankstheSchoolʹsJohnM.OlinCenterforLaw,Economics,andBusinessforitsgeneroussupport.HealsothankshisfacultyadvisorGuhanSubramanianforhisguidance,andhisclassmatesJasonKohoutandJaredGrossforpointersonusingstatisticalsoftware.Table of Contents I. Introduction......................................................................................................................... 3 II. Background on Repurchases............................................................................................... 6 A. Growing Use of Repurchases as Substitutes for Dividends........................................ 6 B. Possible Benefits of Repurchases to Shareholders/Investors...................................... 7 1. Tax Advantages of OMRs over Dividends............................................................. 7 2. Distribution Costs: OMRs vs. Dividends ............................................................... 8 3. OMRs and Employee Stock Option Plans.............................................................. 8 4. Liquidity.................................................................................................................. 9 C. Possible Harm to Investors: False Signaling and Bargain Repurchases..................... 9 D. Regulation................................................................................................................. 14 1. Insider Trading and Rule 10b-5............................................................................ 14 2. Stock Manipulation and the 10b-18 Safe Harbor ................................................. 14 3. Disclosure ............................................................................................................. 15 III. Methods, Results & Discussion.................................................................................... 16 A. Sample and Data ....................................................................................................... 17 B. Descriptive Statistics................................................................................................. 18 C. Measuring Repurchase Program Completion: Shares vs. Dollars............................ 19 D. Results and Comparison with Previous Studies ....................................................... 20 1. The Disclosure rule decreased the proportion of firms that failed to complete their announced repurchases ................................................................................................. 20 2. Response to Possible Critiques............................................................................. 26 3. Other measures of repurchase completion............................................................ 28 4. Difficulty of Estimating Repurchases Before the Disclosure Rule ...................... 33 IV. Conclusion .................................................................................................................... 36 2THE EFFECT OF ENHANCED DISCLOSURE ON OPEN MARKET