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

Abstract

Manuscript type: Research paper
Research aims: The purpose of this paper is to examine the impact
of open market share repurchases on stock liquidity of listed
companies in Thailand.
Design/ Methodology/ Approach: The sample includes 3,055 actual
share repurchases made by 75 listed firms in the Stock Exchange of
Thailand (SET) over a period of 13 years from 2002 to 2014. Multiple
regressions are used to examine linear and non-linear relationships
between actual share repurchases and liquidity measures.
Research findings: Results show that actual share repurchases
generally have beneficial impacts on liquidity. This is indicated
by narrower bid-ask spreads and smaller price impact as firms
repurchase more shares. Nonetheless, the impact of share
repurchases on stock liquidity of Thai listed firms tends to be nonlinear.
At low level share repurchases, repurchasing more shares
increases liquidity but at high level share repurchases, acquiring
more shares impair liquidity.
Theoretical contributions/ Originality: The findings of this
paper shed some light on the long debate regarding the impact of
share repurchases on liquidity by showing that the relationship
between stock repurchases and liquidity is non-linear. It is found
that share repurchases have a positive effect on stock liquidity
if firms repurchase small number of shares per day (price
support hypothesis). However, share repurchases may have a
detrimental effect on stock liquidity if firms buy back shares
aggressively (information asymmetry hypothesis). 

Practitioner/ Policy implications: The study has demonstrated that
a share repurchase programme can be used as an effective tool to
enhance stock liquidity if it is implemented properly.
Research limitations/ Implications: Since the findings of this study
may be applicable only to listed companies in Thailand, future
research should try to extend the analysis to other emerging markets.
Keywords: Liquidity, Share Repurchases, Thailand
JEL Classification: G14, G32, G35