Why Do Repurchases Affect Share Prices?

Repurchases increase share prices, but the reasons for this are controversial. By using data on 140 closed-end funds, which have transparent prices for both shares and asset values, we are able to provide new evidence. There is a small increase in price at the time of the announcement, which is consistent with a market-timing arbitrage. The long-term effects over the next four years are much larger: fund prices outperform by around 4 % per annum, while fund assets outperform by around 3 % per annum. The latter result implies a ‘real ’ effect on operating performance, which cannot be explained by arbitrage (repurchase) profits or by changes in liquidity. These long-term gains are consistent with a ‘governance theory of repurchases’, in which the announcement and execution of repurchases signals that directors have increased their oversight of managers