The Non-Linear Impact of Share Repurchases on Liquidity: The Case of Listed Companies in Thailand (original) (raw)

The Non-Linear Impact of Share Repurchases on Liquidity: The Case of Listed Companies in Thailand

In recent years, open market share repurchases have become a principal method for firms to return cash to shareholders. Grullon and Michaely (2004) document that in the United States (the U.S.), the value of share repurchases has surpassed that of dividends since 1999. Open market share repurchases have also been gaining popularity outside the U.S. as is evidenced by a number of studies related to stock repurchases reported in finance literature (for example, Ikenberry, Lakonishok, & Vermaelen, 2000, for Canada; Brockman & Chung, 2001, for Hong Kong; Rau & Vermaelen, 2002, for the U.K.; Ginglinger & Hamon, 2007, for France; De Cesari, Espenlaub, & Khurshed, 2011, for Italy; Isa, Ghani, & Lee, 2011, for Malaysia; and Wang, Lin, Fung, & Chen, 2013, for Taiwan). Although these studies have examined the effect of open market stock repurchases on stock price, assessment of the impact of open market share repurchases on liquidity has received little attention despite its practical importance. Indeed, the results drawn from financial executive surveys and interviews as indicated by Brav, Graham, Campbell, and Michaely (2005) reveal that managers are concerned about the impact of share repurchases on liquidity. In other words, the share repurchases would not be executed if doing so reduces stock liquidity below critical level, which, in turns, has a negative consequence on stock price. Previous studies examining the liquidity impact of share repurchases have, to date, provided mixed results. Wiggins (1994), Singh, Zaman, and Krishnamurti (1994), Franz, Rao, and Tripathy (1995), Cook, Krigman, and Leach (2004), and De Cesari et al. (2011) find that share repurchases help enhance liquidity. However, Barclay and Smith (1988), Brockman and Chung (2001), and Ginglinger and Hamon (2007) document a negative impact of share repurchases on liquidity. Other researchers like Miller and McConnell (1995) and Kim (2005), nevertheless, find no significant change in liquidity as a result of open market share repurchases. This, therefore, raises the question whether or not share repurchases increase or decrease liquidity. The main objective of this study is to provide additional evidence on the impact of actual share repurchases on liquidity in transactions conducted by Thai listed firms over the period of thirteen years from 2002 to 2014. The justifications of focussing on Thailand are as follows. Firstly, the Thai capital market is dramatically different from that of the U.S. and most developed markets. Thailand is a younger, smaller, less sophisticated country and its stock market is seen to be more volatile and substantially less liquid. Rhee and Wang (2009) indicate that the lack of liquidity is a key determinant for high volatility in emerging markets and can impede stock market development. Further, investors tend to consider liquidity as a critical factor when making investment in emerging markets because their returns can be substantially reduced after accounting for liquidity cost (Bekaert, Harvey, & Lundblad, 2007; Agudelo, 2010). Despite the importance of stock liquidity for emerging markets such as Thailand, little investigation into such topic has been undertaken. Secondly, research about share repurchases in Thailand remains underexplored although listed firms in Thailand have been allowed to buy back their own shares since July 2001. Only a few studies seem to focus on such issue. Vithessonthi (2007) was the first to document the positive abnormal stock returns associated with open market share repurchase announcements in Thailand. Vithessonthi (2008) subsequently finds some evidence of the long-run abnormal returns but no significant change in the operating performance following stock repurchase announcements. Surveying executives of 64 repurchasing firms in Thailand from July 2001 to December 2009, Tabtieng (2013) reports that the main objectives of managers for implementing open market share repurchase programmes are to buy back undervalued shares and to increase earnings per share. Thirdly, compared to most developing countries, Thailand has a better disclosure environment of share repurchases. This makes it a very suitable setting for researchers to investigate the effect of actual share repurchases on liquidity with higher precision. Prior studies examining liquidity impact of open market share repurchases in developed countries, especially the U.S., have been hindered by data disclosure regulations. Before 2004, the U.S. companies were only required to report the details of their repurchase activities on a quarterly basis. Since 2004, they have been required to disclose the total number of shares repurchased and the average repurchase price for the previous fiscal quarter on a monthly basis but are not obliged to provide the information about trading dates. Therefore, the disclosure environment of share repurchases in the U.S. still makes it difficult to accurately examine the liquidity impact of actual share repurchases. In the case of Thailand, a repurchasing firm is required to report the volume and value of shares repurchased. It is also mandated to report the price data on a daily basis by the start of the following business day, thus providing timely information and more details of actual share repurchases. This paper contributes to existing finance literature in the following ways. Firstly, this paper relates to two important areas of finance literature - corporate finance and market microstructure. Specifically, this paper shows that actual share repurchases have a significant impact on liquidity. Secondly, the findings of this paper can shed some light on the long debate regarding the impact of share repurchases on liquidity by showing that the relationship between share repurchases and liquidity is non-linear. In particular, the evidence indicates that repurchasing shares is beneficial to liquidity when executed at low level of share repurchases. In contrast, it may be detrimental to liquidity at high level of share repurchases. Thirdly, much of previous works done on the impact of share repurchases on liquidity have been carried out using data drawn from developed markets while data from emerging markets have rarely been investigated. This study thus addresses such scarcity by providing empirical evidence on the impact of share repurchases on liquidity in an emerging economy, namely, Thailand. The remainder of this paper is organised as follows. Section 2 describes the regulatory and disclosure requirements of share repurchases in Thailand. Section 3 reviews related literature and formulates the hypotheses of this study. Section 4 presents the data description, research methodology, and definitions of variables. Section 5 reports the empirical results. Section 6 concludes the paper.