Theprice support argument fulfills a central role in this thesis. Busch andObernberger (2016) assert that price support is one way by which repurchasescan improve the price efficiency of shares. In particular, they build on thework of Hong, Wang and Yu (2008) whom model repurchases as a channel via whichfirms can intervene when share prices drop and when other investors drive shareprices down to sub-fundamental levels. By this intuition repurchases canimprove efficiency as intervening at a certain price level provides a lowerbound for the share below which the price should not drop (Busch and Obernberger,2016). Repurchases thereby convey information regarding a share’s fundamental orintrinsic value. The price adjustment will contain less noise as the droppingshare price, conveying new negative systematic information, now has a lowerlimit as a result of the share repurchase intervention (Busch and Obernberger,2016).
Hence, providing price support thereby increases a stock’s priceefficiency and reduces its idiosyncratic risk. The price support argument doesnot imply managerial timing ability per se. Busch and Obernberger (2016) arguethat exhibiting timing ability is conditional on whether firms repurchaseshares above or below the intrinsic value. If firms repurchase above intrinsicvalue, they merely manipulate stock prices. If firms repurchase below or at intrinsicvalues they exhibit timing ability (Busch and Obernberger, 2016).
Busch andObernberger (2016) provide empirical evidence that share repurchases indeedsupport prices at intrinsic values and therefore improve price efficiency. Furthermore,they find no evidence that managers manipulate prices. Repurchasing shares toprovide price support is an example of how the timing of repurchases can beessential in achieving a desired impact. Busch and Obernberger (2016) alsotheorize about the potential impact share repurchases may have on theinformation content of share prices. By blending the management incentive hypothesis with price impact, Busch andObernberger (2016) propose that share repurchases may in fact reduce theinformation content of shares. Specifically, when managers use sharerepurchases as a means to improve their own compensation, they intentionallyincrease the share price beyond intrinsicvalues.
This increase introduces noise into the share price, which ultimatelydelays the assimilation of both idiosyncratic and market information (Busch & Obernberger, 2016). As a result, theidiosyncratic risk of a share increases and the price efficiency decreases. Busch and Obernberger (2016) reject this notionas they find that US firms repurchase shares at and not above fundamentalvalues. Both the motivation for andthe timing of share repurchases might induce a price impact on shares.
Theultimate price impact of a repurchase in relation to a share’s intrinsic valuelargely determines whether a share repurchase has an adverse or a favorableeffect on the information content and price efficiency of shares.