Essays in finance

This thesis examines the strategic and market implications of open market repurchase (OMR) programs through three interconnected studies that advance our understanding of corporate payout policy and market dynamics. The first chapter provides causal evidence that firms significantly adjust repurchase activity in response to undervaluation. Using price pressure induced by mutual fund flows and leveraging the 2003 mutual fund trading scandal as a natural experiment, I establish that flow-induced valuation shocks causally drive repurchase decisions. Instrumental variable estimates reveal substantially stronger effects than standard regressions, suggesting that the non-fundamental component of fund flows is potent but rare, with its true impact typically masked in conventional analyses. Analysis of long-run stock performance reveals that the well-documented buyback anomaly is primarily driven by repurchase announcements following periods of negative fund flows, highlighting how flow-driven price distortions meaningfully impact corporate payout policy and create predictable patterns in subsequent stock performance. The second chapter examines the puzzling heterogeneity in completion rates of open market repurchase programs, where some announcing firms execute zero repurchases while others complete their programs rapidly. I propose that managers strategically balance duration-dependent costs of undervaluation against immediate costs of share repurchases, with completion decisions signaling expected timelines of information asymmetry resolution. Using hand-collected SEC filing data spanning 2004-2019, I find that low-completion firms significantly outperform analyst forecasts in years one and two post-announcement, while high-completion firms excel in years three and four, with corresponding patterns in market reactions and long-run returns. The third chapter examines how OMR programs affect firms’ exposure to systematic liquidity shocks. I find that repurchasing firms act as buyers of last resort, experiencing significant but temporary declines in liquidity commonality during programs. This reduction in liquidity commonality is accompanied by decreased liquidity risk, highlighting firms’ role in stabilizing against institutional demand and market maker supply variations.