Theoretical and empirical analysis of options in open market share repurchases of Taiwan companies

Pei-Ling Tsai, Yuan-Lin Hsu, Hsiang-Hsuan Chih and Shih-Kuei Lin

International Review of Economics & Finance, 2022, vol. 81, issue C, 205-226

Abstract: This paper derives option pricing models to formulize the flexibility and conditions that managers have in open market share repurchase programs in Taiwan. We extend the exchange option model by including the regulatory price range restriction and the purpose of the share repurchase. We propose the exchange option model (with price range constraints) and the option portfolio model. The simulated and empirical results show that the market reaction is lower than that in the model of Ikenberry and Vermaelen (1996). The price range constraint may block the market reaction when stock prices are volatile. In addition, investors may pay less attention to the repurchase purpose of returning buyback shares to employees, since there will be a small impact on price. Furthermore, we find that the stock volatility has a significant negative impact on the market reaction to the announcements of the share repurchases.

Keywords: Open market share repurchases; Regulatory price range restriction; Exchange option; Option portfolio (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:81:y:2022:i:c:p:205-226

DOI: 10.1016/j.iref.2022.03.012

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