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I address this question by assessing what impact share repurchases have on price
efficiency and the information content of share prices. In particular, I postulate and test two
hypotheses originally developed by Busch & Obernberger (2016). The first hypothesis argues
that various (managerial) incentives for share repurchases increase share prices to levels
above the intrinsic value (Busch & Obernberger, 2016). When share prices deviate from
intrinsic values, noise is introduced into share prices. The introduction of noise into share
prices reduces the overall information content and price efficiency of shares. Conversely,
Busch and Obernberger (2016) argue that if firms repurchase shares at intrinsic values, share
prices converge to their intrinsic values and price efficiency improves.
The second hypothesis states that share repurchases increase either the speed or the
accuracy with which stock prices incorporate information and therefore enhance price
efficiency. According to Busch and Obernberger (2016), the intuition is that share
repurchases can only reflect positive information about a firm because it intervenes in the
market for its own shares through two distinct channels: market orders and limit orders. A
market order entails that shares are repurchased immediately at the prevailing market price. A
firm can therefore instantaneously incorporate information into its stock price by
repurchasing its own shares (Busch & Obernberger, 2016). This means that a market order
can increase the speed with which positive information is reflected in the stock price. Limit
orders on the other hand, imply that firms can increase the accuracy with which information
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is reflected in stock prices. Submitting a limit order means that a firm orders to buy its own
stock at a specific price (the limit price). Busch and Obernberger (2016) reason that a limit
order therefore provides a lower bound for a stock’s price. They argue that a repurchasing
firm can increase the accuracy of a stock price, if a limit order provides price support (or
lower bound) to reflect its intrinsic value (Busch & Obernberger, 2016). These distinct
channels provide two means by which share repurchases improve price efficiency.

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