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The Dynamics of Stock Repurchases

We develop a dynamic model of the timing of share repurchases within a duopolistic industry to analyze the dynamics of share repurchases in the context of the `peer effect' documented in the extant empirical literature. Share repurchase decisions are taken as part of a broader liquidity management policy but also take into account i) the firm's financial resources needed to invest in a potential growth opportunity, and ii) the feedback effect of the competitor's investment threat on the firm's willingness to hold cash to respond to such a threat. We derive the equilibrium timing of such strategic repurchases of both firms, demonstrate that repurchase triggers depending on parameter values can be either strategic complements or strategic substitutes, and generate a number of empirical predictions regarding the expected strength of the peer effect, defined as the distance between the leader and follower repurchase thresholds. Subsequently, based on the universe of Compustat firms, we find empirical support for the model predictions: the peer effect is weakened by the degree of product market competition, financial constraints, and stock illiquidity. Finally, we also present evidence of several cross-effects that are consistent with model predictions.