Why do rms buy back below average market prices?

This paper examines why rms buy back at prices below the average market price. The results of the empirical analysis suggest that contrarian trading is the major driver of the di erence between average monthly repurchase price and average monthly market price. There is also evidence in favor of the notion that at least some rms are able to time the market by exploiting private information. Moreover, contrarian trading and managerial timing are not exclusive explanations of why rms buy back at a bargain. The limit-order-hypothesis suggests that rms are able to buy back at bargain prices because they predominantly use limit orders for buying back their shares. By submitting limit orders at the prevailing bid, repurchasing rms are able to earn the spread. One of the implications of this hypothesis is that the exogenous bid-ask spread and bargains are positively correlated, i.e. a higher spread is accompanied by higher bargains. Furthermore, the bargains should be higher the more trades are executed at the ask. Therefore, an order imbalance towards trades at the ask price should as well increase the bargain. The empirical evidence presented in this paper is in line with these