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Repurchases for Price Impact: Evidence from Fragile Stocks

Published online by Cambridge University Press:  22 May 2024

Massimo Massa ,
David Schumacher Open the ORCID record for David Schumacher [Opens in a new window]  and
Yan Wang
Massimo Massa
Affiliation:
INSEAD massimo.massa@insead.edu
David Schumacher*
Affiliation:
McGill University Desautels Faculty of Management
Yan Wang
Affiliation:
McMaster University DeGroote School of Business ywang@mcmaster.ca
*
david.schumacher@mcgill.ca (corresponding author)
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Abstract

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We highlight an important but overlooked characteristic of financial fragility: “Fragile” stocks command higher liquidity. This reduces their sensitivity to corporate actions with price impact and affects the firms’ incentives to engage in such actions. We show that fragile firms have lower share repurchases, issue more equity, and invest more. We establish causality by relating changes in corporate actions to exogenous changes in fragility induced by mergers of asset managers. Our results suggest that financial fragility has direct but unexpected real implications for corporate actions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 33
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Yakov Amihud, Mara Faccio (the editor), Mariassunta Giannetti, Kristine Hankins (discussant), and seminar participants at McGill and the 2022 AFA Annual Meetings for comments and suggestions. Massa and Schumacher are grateful for research support from the Social Sciences and Humanities Research Council of Canada (SSHRC; Grant No. 435-2015-0615). Wang is also grateful for research support from the SSHRC (Grant No. 435-2019-1283). A previous version of this article was entitled “The Bright Side of Financial Fragility.” All errors are our own.

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