Seminar

The impact of asset repurchases and issues in an experimental market

Charles Noussair (Tilburg University)

March 1, 2010, 12:30–14:00

Room MF 323

Fédération des Banques Françaises Seminar

Abstract

We create an experimental asset market in which we conduct share repurchases and share issues. Although the intrinsic value of the shares is independent of the quantity outstanding, the interventions result in changes in asset price. We find that: (1) A repurchase of shares increases the price of the asset, and a share issue decreases the price of the asset, compared to a benchmark of no intervention. These effects are consistent with the capital structure puzzle, a negative correlation that is typically observed between the price and the supply of shares of stock. (2) The empirical patterns observed are consistent with a model proposed by DeLong et al. (1990), which posits three trader types-- fundamental, speculator, and momentum-- interacting in the market. (3) The downward pressure on prices resulting from share issues drives prices down toward, but not beyond, fundamental values. We argue that this downward resistance at the fundamental value arises from the impact of an intervention on the proportion of the total stock of units and cash held by each trader type.