Do Firms Actually Buy-back Their Own Shares under Rule 10b5-1 Stock Repurchase Programs?
(in progress) Rule 10b5-1, as a part of the SECs Final Rule: Selective Disclosure and Insider Trading, proposes that a trade is deemed to be made on the basis of material nonpublic information as long as the trader/issuer was aware of the information when the trade was made. Public companies may integrate Rule 10b5-1 into their stock repurchase programs (SRPs) by taking advantage of affirmative defenses provided by the rule. Under 10b5-1 SRPs, firms can repurchase their own shares at any time, regardless of blackouts. On the other hand, firms pre-commit themselves to buyback their own shares, sacrificing the inherent flexibility of open market repurchases. We study how the markets react on the announcements of Rule 10b5-1 SRPs, comparing to open market repurchases. If there is any difference in market reactions, we investigate the potential determinants based on various hypotheses. Further, we study 10b5-1 firms actual buyback activity has anything to do with the market reactions.
