Universit Paris Dauphine

Ecole doctorale EDOGEST Centre de recherche CEREG

Impact des rachats dactions sur la liquidit et la rentabilit des actions

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Impacts of share repurchases on market liquidity and shares return Thse Pour lobtention du titre de Docteur en Sciences de Gestion Prsente et soutenue publiquement le 15 avril 2011 par
Alexandre BRUNEL

Jury Directeur de thse : Monsieur Jacques HAMON Professeur lUniversit Paris Dauphine Rapporteurs : Madame Fany DECLERCK Professeur lUniversit de Toulouse 1 Monsieur Jean-Franois GAJEWSKI Professeur lInstitut de Management de lUniversit de Savoie Suffragants : Madame Edith GINGLINGER Professeur lUniversit Paris Dauphine Monsieur Thierry FRANCQ Secrtaire Gnral de lAutorit des Marchs Financiers

Luniversit nentend donner aucune approbation ni improbation aux opinions mises dans les thses : ces opinions doivent tre considres comme propres leurs auteurs.
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Bien quune thse soit considre comme le produit dun travail personnel, jai une pense particulire pour toutes les personnes qui ont contribu, de prs ou de loin, la rflexion, la ralisation de mes travaux et qui ont su porter sur mes travaux leur regard critique, juste et avis. La premire personne que je tiens remercier est Grard Rameix, ancien Secrtaire Gnrale de lAMF, pour mavoir autoris exploiter des donnes non publiques et mener ce projet paralllement mon activit professionnelle au sein de lAMF. Je remercie tout particulirement le Professeur Jacques Hamon, mon directeur de thse, qui, avec passion, a toujours rpondu de manire trs ractive mes sollicitations et parfois mes angoisses. Je dois galement mes remerciements Nathalie Galizot-Corme et Julien Terramorsi qui ont grandement contribu la structuration de la base de donnes et ltablissement de lalgorithme didentification des ordres et des transactions. Merci Thierry Michel et aux PhD students de Georgia State University dAtlanta, pour leurs critiques avises et leur soutien. Je remercie chaleureusement Isabel Tkatch davoir partag une partie de ses immenses connaissances en conomtrie. Je remercie bien videment les membres du jury qui ont bien voulu consacrer du temps lvaluation de ces travaux. Le plus fort de mes remerciements est pour mon pouse, qui a support mes milliers dheures de mutisme, pour ses relectures, ses corrections minutieuses et pour son perfectionnisme contagieux.
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Table des matires

INTRODUCTION .......................................................................................................... 9 1. PRESENTATION DU SUJET ..................................................................................... 12 2. HYPOTHESES TESTEES ........................................................................................... 15 3. APPROCHE ORIGINALE DE LA THESE ................................................................ 17 4. RESULTATS ET CONTRIBUTION AU DEBAT ACADEMIQUE ......................... 19 5. PLAN DE LA THESE ................................................................................................. 24

CHAPITRE LIMINAIRE ............................................................................................ 27

1. EVOLUTION DE LA REGLEMENTATION DES RACHATS DACTIONS ...................... 28 2. REGIME REGLEMENTAIRE EN VIGUEUR ENTRE 1998 ET 2004 ................................. 30 2.1. 2.2. Suites donnes au rapport Esambert.......................................................................... 30 Admission des contrats de liquidit .......................................................................... 31

3. REGIME REGLEMENTAIRE EN VIGUEUR DEPUIS 2004 ............................................... 32 3.1. 3.2. Rgime drogatoire des rachats dactions ................................................................. 32 Pratiques de march admises .................................................................................... 33

4. STATISTIQUES DESCRIPTIVES RELATIVES AUX RACHATS DACTIONS ............... 34

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PREMIERE PARTIE .................................................................................................... 39 1. FRENCH LEGAL FRAMEWORK AND DATASET ............................................ 46

1.1. French Repurchase Regulations ..................................................................................... 46 1.2. Euronext Paris Market Structure .................................................................................... 48 1.3. Data ................................................................................................................................ 49 1.4. Sample ............................................................................................................................ 51

2. HYPOTHESES ........................................................................................................... 51
2.1. Competing Market-Maker vs. Information Asymmetry Hypotheses ............................ 52 2.2. Empirical Results........................................................................................................... 53 2.3. Some extensions of hypotheses ..................................................................................... 54

3. MANAGERS TIMING ABILITY AND REPURCHASE DECISION .................... 56

3.1. Managers Timing Ability .............................................................................................. 56 3.2. Managers Repurchase Decision .................................................................................... 58 3.3. Sample selection model for repurchasing decision ........................................................ 60

4. IMPACT OF REPURCHASES ON MARKET LIQUIDITY .................................... 63

4.1. Univariate and Intraday Analysis ................................................................................... 64 4.2. Multivariate Analysis ..................................................................................................... 67

5. PROPENSITY SCORE MATCHING METHOD TO ESTIMATE THE LIQUIDITY DETERIORATION........................................................................................ 69

5.1. Assumptions and Measures of Treatment Effect ........................................................... 69 5.2. Propensity Score and Matching Estimators................................................................... 72 5.3. Repurchases as Treatment ............................................................................................. 73

6. CONCLUSION ............................................................................................................ 75 REFERENCES ................................................................................................................ 77

Table 1: Fictitious example of a monthly report of repurchase shares program ...................... 80 Table 2: Fictitious example of transactions recorded in the Paris stock exchange................... 80 Table 3: Summary Statistics of the Sample .............................................................................. 81 Table 4: Repurchase Price Comparison.................................................................................... 82 Table 5: Tobit model of daily repurchases ............................................................................... 83 Table 6: Sample selection estimation of daily repurchases ...................................................... 84 Table 7: Effects of firms orders and trades on liquidity .......................................................... 85 Table 8: Regression of liquidity impact.................................................................................... 86

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DEUXIME PARTIE ................................................................................................... 87 1. LEGAL FRAMEWORK AND DATASET .................................................................... 93

1.1 Repurchase Regulations........................................................................................................... 93 1.2. Euronext Paris Market Structure ............................................................................................ 96 1.3. Sample and Data ..................................................................................................................... 97

2. REPURCHASES AS PAYOFF TO SHAREHOLDERS................................................ 98

2.1. Definition of Panel Data Model .............................................................................................. 99 2.2. Panel Data Model Applied to Dividends and Repurchases .................................................. 101

3. DESCRIPTIVE FIGURES OF REPURCHASE ........................................................... 103 4. REGIME SWITCHING MODEL APPLIED TO REPURCHASES ............................ 105
4.1. Switching Determined by Shares Price Return..................................................................... 105 4.2. Switching Determined by Shares Valuation ......................................................................... 107

5. BEHAVIOUR OF LIQUIDITY CONTRACTORS ...................................................... 110 6. REACTIONS TO EXTREME MARKET SHOCKS .................................................... 111
6.1. Univariate Tests on Equality on Traded Quantities .............................................................. 112 6.2. Reactions in October 2008.................................................................................................... 113

7. CONCLUSION ............................................................................................................. 116 REFERENCES .................................................................................................................. 118

Table 1: Firms sample ................................................................................................................ 120 Table 2: Fictitious excerpt of a monthly report of share repurchase program ............................. 121 Table 3: Fictitious excerpt of transactions recorded in the Paris stock exchange........................ 121 Table 4: Panel data model on determinants of dividends and repurchases.................................. 122 Table 5: Switching model determined by returns ........................................................................ 123 Table 6: Regime switching model determined by share value .................................................... 123 Table 7: Panel data for liquidity contractors trades ..................................................................... 124 Table 8: Univariate tests on firms and liquidity contractors reactions during price shocks ........ 125 Figure 1 ........................................................................................................................................ 127 Figure 2 ........................................................................................................................................ 127 Figure 3 ........................................................................................................................................ 128 Figure 4 ........................................................................................................................................ 128 Figure 5 ........................................................................................................................................ 129

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TROISIEME PARTIE .................................................................................................131 1. LIQUIDITY CONTRACTS IN SHARE REPURCHASE PROGRAMS ................. 137 2. MARKET AND DATASET ...................................................................................... 141
2.1. Euronext Paris Market Structure ..................................................................................... 141 2.2. Dataset ............................................................................................................................. 141

3. DESCRIPTIVE STATISTICS AND TIMING .......................................................... 143 4. EXECUTION COSTS AND PRICE IMPACT ......................................................... 146
4.1. Implementation Shortfall and Realized Half-Spreads ..................................................... 146 4.2. Execution Cost Discount ................................................................................................. 149 4.3. Effects on Price Volatility ............................................................................................... 151

5. LIQUIDITY IMPACT ............................................................................................... 152 6. DETERMINANTS OF ORDER AGGRESSIVENESS AND ORDER SUBMISSION STRATEGY ............................................................................................................... 155
6.1. Determinants of Orders Aggressiveness ........................................................................ 156 6.2. Aggressive Buy Orders to Support Price ......................................................................... 160

7. CONCLUSION .......................................................................................................... 161 REFERENCES ........................................................................................................163

Figure 1 : Cumulated quantity of shares repurchased and sold in intraday ............................ 166 Figure 2: Proportion of trades involving liquidity contractors in intraday ............................. 166 Figure 3 : Proportion of submited orders in intraday ............................................................. 167 Figure 4: Submission rate of limit orders ............................................................................... 167 Table 1: Excerpts from a monthly report of the share repurchase program ........................... 168 Table 2: Excerpts of transactions recorded in the Paris stock exchange ................................ 168 Table 3: Proportion of the orders submitted sorted by aggressiveness................................... 169 Table 4: Execution costs, price impact and execution costs discount .................................... 170 Table 5: Regression on daily volatility ................................................................................... 171 Table 6: Liquidity impact of liquidity contractor orders ........................................................ 172 Table 7: Distribution of Spread Variations............................................................................. 172 Table 8: Coefficients of Ordered Probit Model ...................................................................... 173 Table 9: Marginal Effects ....................................................................................................... 174

CONCLUSION ............................................................................................................175
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Introduction

Toute socit qui veut tre maitresse la Bourse, pour maintenir le cours de ses actions, est une socit condamne. Emile Zola LArgent, 1891

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Mes travaux portent sur limpact des oprations de rachat dactions des socits mettrices (les metteurs ) cotes la Bourse de Paris, sur la liquidit des marchs financiers et sur la rentabilit des actions. Dun point de vue strictement technique, une opration de rachat dactions est dfinie comme lachat dune action dune socit mettrice, cote en bourse, par cette mme socit sur le march. Lopration financire est donc relativement simple. Une socit peut mettre des actions pour de nombreuses raisons, par exemple, pour financer son dveloppement en faisant un appel public lpargne. A loppos, une socit mettrice peut ncessiter dacqurir, sur le march, ses propres actions, par exemple, lorsquelle verse des stock options ou des actions gratuites ses salaris ou lorsquelle a mis des titres de crance convertibles en titres de capital, les actions servant alors dinstruments de couverture. Plus largement, les rachats dactions au fil de leau sur le march par la socit est une pratique courante aux Etats-Unis depuis les annes 1970. Ils sont considrs comme un moyen de rmunration des actionnaires mais galement un outil de gestion financire part entire. En effet, les rachats dactions peuvent se justifier par le contexte conomique. Si la socit dispose dune trsorerie abondante et que les taux dintrt sont faibles, par exemple, si le taux dautofinancement est lev, ou bien si les opportunits dinvestissement sont juges peu attractives, la socit peut prfrer rtribuer ses actionnaires par des rachats dactions plutt que maintenir une trsorerie excdentaire sous exploite. Le rachat dactions en tant quoutil de gestion financire est trs rpandu aujourdhui. A titre dillustration, la socit Carmat a rcemment t introduite sur le march Alternext en ouvrant son capital pour lever des fonds et pour poursuivre le dveloppement de son activit. Paralllement la ralisation des objectifs susviss, la socit a approuv un programme de rachat dactions mis en uvre thoriquement ds le premier jour de cotation. En dautres
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termes, tandis que la socit cre des actions, elle en retire du march potentiellement au mme moment. Loriginalit de lopration de rachat dactions tient en ralit non pas la nature de lopration mais la nature de linvestisseur qui rachte, en loccurrence la socit mettrice. Les dirigeants de la socit grent aussi bien la stratgie commerciale, financire et dinvestissement de la socit que la mise en uvre des oprations de rachat dactions sur le march financier. De plus, ils sont responsables de la publication de linformation financire relative la socit, telle que les rapports dactivit, les comptes de rsultats, qui peut servir aux investisseurs pour valoriser laction. En ce sens, une ingalit des investisseurs au regard de linformation pourraient apparaitre entre les investisseurs (qui demandent de linformation) dune part et les socits (qui produisent de linformation) qui rachtent leurs propres actions dautre part. Au-del de cette ingalit, un risque au niveau de lquilibre financier de la socit peut apparaitre ; une socit nayant pas vocation dtenir une part trop leve de ses propres actions durablement. Les risques lis au rachat dactions ont t identifis ds 1998 par le lgislateur franais qui a encadr la pratique avec des contraintes spcifiques. En 2004, un rglement europen est venu harmoniser le cadre en posant pour principe que le rachat daction est une opration qualifiable dabus de march mais qui savre justifie et lgalement autorise dans la limite des contraintes dintervention poses. Des drogations ont galement t offertes par le lgislateur en matire de rachat dactions avec dune part la cration de contrats de liquidit et dautre part, lautorisation accorde aux socits de vendre leurs actions. Le rachat dactions doit donc tre considr comme une pratique financire sinscrivant dans le cadre dune rglementation juridique spcifique. Un chapitre liminaire
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prsente les diffrents cadres rglementaires en vigueur durant les priodes analyses dans cette thse.

1. PRESENTATION DU SUJET Lobjet de la thse est dapprhender le comportement de rachat dactions des socits et des contrats de liquidit en tudiant limpact des oprations de rachat dactions sur la liquidit des marchs financiers et sur la rentabilit des actions. La thse traite plus prcisment quatre points portant i) sur les motivations des socits racheter leurs propres actions, ii) sur lefficacit des contrats de liquidit au regard des objectifs qui leur sont assigns, iii) sur la prise en compte de la liquidit des marchs et de la rentabilit des actions dans le processus de dcision des socits et des contrats de liquidit (ex ante) et limpact de ces dcisions sur la liquidit et la rentabilit (ex post) et iv) de manire plus gnrale, sur le processus de libralisation rglementaire de la pratique de rachat dactions. La question de la motivation des socits racheter leurs propres actions est un sujet majeur, tant du point de vue du rgulateur que du point de vue acadmique. Les besoins en titres des socits ont t intgrs par le lgislateur et le rgulateur qui ont, depuis 1998, favoris les programmes de rachat en assouplissant les contraintes lies au rachat dactions. Pour autant, les objectifs et les motivations des rachats dactions, tels que la couverture ou la gestion de trsorerie, peuvent cacher dautres aspects lis par exemple aux avantages tirs par les socits de lasymtrie dinformation sur le march des actions. La socit peut en effet tre place dans une situation trs avantageuse pour acqurir des titres bas cot du fait de linformation quelle dtient sur la valeur intrinsque de laction au dtriment des investisseurs moins informs.

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De plus, les rachats dactions peuvent galement tre motivs par une stratgie de soutien de cours. Lorsque le cours est jug trop bas ou est victime dun choc ngatif, la socit peut procder des rachats dactions pour rorienter le cours un niveau que la socit estime plus proche de sa valeur intrinsque. Dans le contexte de soutien de cours, les rachats dactions pourraient tre perus par les actionnaires comme un mcanisme de couverture de leur capital. Outre les motivations de la mise en uvre des programmes de rachat dactions, le sujet fondamental abord dans la thse concerne le processus de dcision dintervention des socits sur leurs propres actions. Les questions poses sont dune part didentifier le moment des interventions des socits sur leurs propres actions et dautre part de dterminer les raisons pour lesquelles le timing observ a t choisi. De plus, dans la mesure o la rglementation franaise a permis aux socits de racheter mais galement de vendre, la question est largie pour dterminer dans quelle mesure la possibilit de vendre des titres sur le march affecte le comportement de rachat des socits. Parmi les lments dterminant pour expliquer les interventions des socits sur leurs propres actions, la liquidit du march et la rentabilit des actions sont privilgis. La liquidit est en principe un lment important dans les programmes de rachat dactions. Cest prcisment pour cette raison que les contrats de liquidit ont t crs en 2000. Ils ont pour objectif dapporter de la liquidit aux marchs. En effet, un march plus liquide rduit les cots de transaction sur les actions et encourage de nouveaux investisseurs oprer sur le march. Dterminer limportance de la liquidit dans le processus de rachat dactions (ex ante) est une des questions poses dans la thse ; les socits saisissent-elles lopportunit dune fentre de liquidit leve pour racheter des actions un cot de transaction moindre ? La question de la liquidit est galement pose en prenant en compte les oprations de rachat dactions effectues par les socits (ex post) afin de dterminer dans quelle mesure la
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liquidit des marchs est affecte par les interventions des socits. Compte tenu de leurs besoins levs en titres, les socits dgradent-elles sensiblement la liquidit en intervenant sur le march ou cherchent-elles minimiser leur empreinte sur la liquidit ? Le second lment suppos dterminant dans les rachats dactions et trait dans la thse concerne la rentabilit des actions. La premire question pose est la suivante ; de quelle manire la rentabilit passe des actions affecte-elle la dcision des socits de racheter ou de vendre des actions (ex ante) ? Si lon se fonde sur lhypothse de soutien de cours, une chute des cours inciteraient les socits racheter des actions. En outre, lannonce de rachat dactions par les socits peut vhiculer un message doptimisme pour les investisseurs. Si lon tient compte du fait que les dirigeants des socits dtiennent une information prive sur la valeur intrinsque de laction, ceux-ci pourraient tre amens racheter des titres avant une remonte des cours. En dautres termes, les rachats dactions peuvent avoir galement un impact endogne sur la rentabilit future des actions (ex post) ou anticiper une rentabilit future positive. Pour ce qui concerne le rgulateur et les praticiens, ces sujets sont importants dans le sens o une meilleure comprhension des comportements de rachat dactions des metteurs permet de dfinir le cout social de la prsence de ces investisseurs informs sur le march et de vrifier si la rglementation visant rquilibrer tant que possible lasymtrie dinformation est adapte ou non. De plus, du point de vue dun investisseur, la thse propose une vision originale sur les couts et les avantages que procurent les rachats dactions ; la couverture sur le capital par le biais dun soutien de cours et une meilleure interprtation de la valeur intrinsque de laction au regard de la quantit et du timing des rachats effectus pourraient tre perus comme les avantages. Les couts seraient le risque li la structure en capital (niveau dauto-dtention lev) et ventuellement une dgradation de la liquidit.
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2. HYPOTHESES TESTEES Les deux principales hypothses tudies dans la thse sont lhypothse dasymtrie dinformation et lhypothse de soutien de cours. La notion dasymtrie dinformation entre agents conomiques a permis de mieux cerner certains mcanismes conomiques, notamment le mcanisme de dtermination des prix. Dans le cas des rachats dactions, les socits sont supposes dtenir une information sur la valeur intrinsque de laction a priori meilleure que linformation dtenue par les autres participants au march financier. Autoriser les socits racheter leurs actions, dans le cadre des programmes de rachat, revient autoriser des investisseurs potentiellement informs intervenir sur le march en leur permettant de racheter un cot infrieur la valeur intrinsque des actions. Barclay and Smith (1988) voient dans lasymtrie dinformation et lavantage informationnel quelle procure aux socits lorigine du dveloppement rapide des rachats dactions aux Etats-Unis. Daprs ces auteurs, lexistence dune asymtrie dinformation sur le march conduit une dgradation de la liquidit ; les investisseurs informs sont supposs saisir les opportunits rapidement ds quelles se prsentent, contrairement aux investisseurs non informs qui nont pas ncessairement de prfrence pour une excution immdiate de leurs ordres. Les investisseurs informs sont donc prts traverser la fourchette en passant des market orders afin que leurs ordres soient rapidement excuts. En consquence, la prsence dinvestisseurs informs rduit la confiance que les investisseurs moins informs ont dans le march. La fourchette slargit et la quantit de titres propose dans le carnet dordres ou par le teneur de march se rarfie, dgradant la liquidit. En dfinitive, lasymtrie dinformation permet la socit dacqurir des actions moindre cot, celui-ci tant en ralit support par tous les autres investisseurs en ce sens que la liquidit diminue et que les cots de transaction augmentent.
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La seconde hypothse teste est lhypothse de soutien de cours. Cook, Krigman et Leach (2004) rvlent que la majorit des dirigeants des socits amricaines ayant mis en uvre un programme de rachat a t motive par le cours de laction jug sous-valoris. De fait, le rachat dactions leur semblait tre une bonne opportunit dinvestissement. Par la suite, Zhang (2005), McNally, Smith et Barnes (2006), Ginglinger et Hamon (2007), et Keswani, Yang et Young (2007) ont dvelopp lhypothse de soutien de cours selon laquelle les socits auraient un comportement contrarian en rachetant massivement contre-tendance lorsque le cours est orient la baisse. Les rachats dactions seraient alors utiliss pour soutenir, ponctuellement, le cours des actions en cas de choc ngatif. Cette hypothse nest pas en contradiction avec lhypothse dasymtrie

dinformation. Cependant, ce schma pourrait tre en contradiction avec une autre hypothse selon laquelle les rachats dactions constituent une forme de rmunration des actionnaires au regard des performances conomiques de la socit. Cela peut galement suggrer que les rachats dactions et les dividendes sont motivs par des raisons diffrentes, voire opposes1. Leur ventuelle substituabilit pourrait alors tre conteste. Dans ce contexte, les rachats dactions serviraient aussi de rgulateur au cours de bourse en fonction de la valeur estime juste par la socit et la valeur value par le march. Sous langle de ces deux hypothses, limpact des rachats dactions sur la liquidit et la rentabilit des actions, ainsi que la contribution de ces lments dans le processus de rachat dactions sont traits.

Si lon admet, bien videmment que les dividendes sont dtermins par les performances conomiques de la socit.

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3. APPROCHE ORIGINALE DE LA THESE La thse contribue au dbat acadmique en apportant des pistes de rflexion nouvelles. Loriginalit de cette thse repose sur des lments qui permettent daborder la rflexion sous un angle diffrent et qui ont permis dobtenir des rsultats plus prcis. Premirement, par rapport aux cadres lgislatifs amricain (Cook, Krigman et Leach, 2004) et hongkongais (Brockman et Chung, 2001), le rgime rglementaire des rachats dactions en France offre une alternative originale du fait de la libert accorde tant aux socits rachetant leurs actions qu linformation rapporte au march sur les oprations ralises. Entre 1998 et 2004, les socits franaises taient autorises racheter leurs propres titres ainsi qu les revendre, selon les objectifs poursuivis. Cette originalit lgislative permet de mener des travaux en distinguant les comportements des socits qui ne font que racheter (buy-and-hold) et les socits qui rachtent et revendent (buy-and-sell). Cette multiplicit des comportements permet daffiner ltude des comportements des socits et de les comparer. De plus, les exigences en matire dinformation publie constituent un lment intressant de la rglementation rgissant les rachats dactions en France. Sous le rgime rglementaire applicable entre 1998 et 2004, les transactions effectues par les socits taient publies seulement une fois par mois. Les publications sont ensuite passes un rythme hebdomadaire en application du Rglement Europen. A titre de comparaison, le cadre lgislatif amricain en vigueur au moment de ltude de Cook, Krigman and Leach (2004) ne prvoyait pas de dclaration des transactions par les socits au march tandis que le cadre hongkongais, analys par Brockman and Chung (2001), exigeait une dclaration au march ds le lendemain de la transaction. La rglementation franaise se situe donc, en termes dexigence de transparence, entre un cadre amricain peu transparent et un cadre hongkongais ractif et transparent. Cette transparence est essentielle dans le dbat car elle peut induire une certaine endognit dans le comportement des socits et des participants au march. Par
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exemple, on peut supposer que labsence dune dclaration au march incite les socits user, voire abuser de lasymtrie dinformation et quune transparence accrue limite cette incitation. En loccurrence, cest une explication avance par Cook, Krigman et Leach au fait que leurs rsultats sont contradictoires avec ceux obtenus par Brockman et Chung. Deuximement, les donnes utilises pour mes travaux sont dune grande richesse et permettent des analyses trs fines. LAMF a gracieusement mis ma disposition les dclarations mensuelles adresses par les socits et les donnes de march reues quotidiennement dEuronext Paris. Il a ncessit plus de six mois pour compiler les transactions effectues par les socits sur leurs propres actions. Au final, la base de donnes rassemble toutes les transactions de toutes les socits cotes et ayant mis en place un programme de rachat dactions, incluant les achats mais galement les ventes, les transactions faites directement et celles effectues dans le cadre des contrats de liquidit, entre le 1er avril 2003 et le 30 septembre 2004. Une autre base de donnes a t construite sur un chantillon de socits entre le 1er janvier 2005 et le 31 dcembre 2009. De plus, les donnes de march incluent toutes les transactions effectues sur Euronext Paris mais surtout les ordres passs par les membres de march pour compte propre ou compte de tiers, avec notamment lheure de passation de ces ordres dans le carnet dordres. Elles sont dune grande valeur lorsque lon tudie le comportement et le processus de dcision dacteurs du march. En effet, les transactions ne sont pas suffisantes de ce point de vue, les ordres permettent didentifier prcisment le moment o la dcision dintervenir sur le march a t prise. Ces donnes ont ainsi permis dapprhender des notions qui navaient pas t traites jusque l dans les dbats acadmiques sur les rachats dactions puisque : Les donnes mont permis i) didentifier le type dordres, en termes dagressivit, passs par les socits, ii) de positionner ces ordres dans le carnet dordre, iii) de mesurer le temps de prsence dans le carnet de ces ordres et iv) de mesurer prcisment et
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immdiatement la manire avec laquelle larrive ou lexcution dun ordre affecte la forme du carnet dordres. Cela savre tre une grande avance puisque jusqu prsent, seuls McNally, Smith et Barnes (2006) avaient tent didentifier la proportion de market orders des socits en utilisant lalgorithme approximatif de Lee et Ready (1991). Les donnes mont galement permis de construire des analyses intra-journalires (dans la premire et troisime partie de la thse) pour rpondre de manire plus fine aux tudes dimpact sur la liquidit et sur la rentabilit menes par Cook, Krigman et Leach et par Brockman et Chung. Elles ont galement rendu possible lanalyse des rachats sur une priode rcente, puisque ces dernires ont un peu plus dun an danciennet (dans la seconde partie de la thse). Elles ont rendu possible ainsi une tude sur le soutien de cours lors des sances durant lesquelles les cours ont fortement chut notamment durant la crise rcente de 2008.

4. RESULTATS ET CONTRIBUTION AU DEBAT ACADEMIQUE Sur le plan acadmique, la thse apporte des lments de rponse intressants quant aux deux hypothses prsentes ainsi quau regard du comportement des contrats de liquidit : Premirement, sur lhypothse dasymtrie dinformation, les rsultats de mes travaux de recherche montrent que les socits paient moindre cot les actions quelles rachtent. Lanalyse dmontre que les socits suivent une stratgie de minimisation des cots dacquisition des actions avec une certaine efficacit sur le long terme. Lapproche originale par type de socits rvle toutefois que les socits qui rachtent et vendent ne font pas de profits significatifs long terme. Lanalyse intra-journalire permet daller encore plus loin dans lobservation du comportement des socits. En effet, il savre que les socits se comportent en contrarians, rachetant contre-tendance lorsque les cours baissent, mais le cot pay est toujours infrieur

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au cours moyen (VWAP) sur la journe. A loppos, lorsque les socits vendent, les ventes sont gnralement prcdes dune hausse significative des cours. Pour autant, teste sur un horizon de quelques jours, cette stratgie de minimisation des cots dacquisition des actions ne serait pas lie une information prive. En effet, aucun des deux modles multivaris utiliss, Tobit model et sample selection model, ne dmontrent vritablement lutilisation dune information. Ltude du timing des transactions des metteurs met en avant le fait que les rsultats dune analyse intra-journalire peuvent tre diffrents de ceux dune analyse sur quelques jours. En revanche, dans ltude de limpact sur la liquidit des rachats dactions, lanalyse intra-journalire savre particulirement prcieuse. En effet, ltude des rachats des socits franaises rvle que la liquidit du march se dgrade la suite des transactions des socits et que cette dgradation rsulte uniquement de lagressivit des ordres des socits. Les socits ne tiennent pas compte de la liquidit dans leur processus de dcision. Elles ne profitent pas de conditions de liquidit ponctuellement plus favorables pour racheter des actions meilleur prix (ex ante) et ngligent limpact nfaste sur la liquidit de leurs ordres agressifs (ex post). Ces rsultats sont uniques et vont beaucoup plus loin que lanalyse de Brockman et Chung. Ces derniers, observant la dgradation de la liquidit conscutivement lintervention des socits, en dduisent que les autres participants se dsengagent du march du fait de la prsence de la socit, en qualit dinvestisseur inform. Au moins, pour ce qui concerne le march franais, lanalyse montre que le march est plus liquide aprs les transactions des socits quavant, une fois le choc de leurs ordres agressifs trs rapidement absorb. Les participants ne quittent donc pas le march et ne dduisent donc rien sur lasymtrie dinformation, cest bien lagressivit des ordres des socits qui dgrade la liquidit, sur une trs brve priode.
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En rsum, les socits affichent une certaine habilet racheter moindre cot mais, malgr cela, il nest pas permis daffirmer que leur stratgie repose sur une information prive. Ces conclusions confortent les rsultats de Cook, Krigman et Leach sur les socits amricaines et sopposent ceux de Brockman et Chung sur les socits hongkongaises. Les travaux de Cook, Krigman et Leach prsentaient des faiblesses et des biais de slection au niveau des donnes exploites2. La prsente tude du cas franais prend en compte les deux types de comportement (buy-and-hold et buy-and-sell) et privilgie lanalyse intra-journalire. Deuximement, sur lhypothse de soutien de cours, titre prliminaire, une comparaison entre les dividendes et les rachats dactions est propose afin de montrer que les rachats dactions sont sensibles aux variations des cours de bourse des actions des socits, contrairement aux dividendes. Cette comparaison est destine reflter linteraction qui existe entre les rachats dactions et la rentabilit des actions et se positionne, en prambule, lanalyse du soutien de cours. La premire ide est de montrer quun lien de causalit entre les rachats dactions et la rentabilit des actions peut exister. Cest lobjet de la premire partie de la thse sur lasymtrie dinformation. La seconde ide est de montrer que les rachats dactions seraient eux-mmes motivs par la rentabilit des actions et ne seraient pas seulement corrls aux performances conomiques de la socit. Cest lobjet de la seconde partie de la thse. Lhypothse de soutien de cours suggre que les rachats dactions peuvent tre perus comme une forme de couverture pour les actionnaires dans le sens o la socit intervient sur le march pour protger le capital des actionnaires en cas de forte baisse du cours par des rachats dactions massifs. Ltude mene dans le cadre de cette thse montre, de manire originale, que la rentabilit des actions est un facteur dterminant dans la dcision de rachat dactions. En
2

Ltude est mene partir de donnes collectes directement auprs de socits ayant rachet leurs actions.

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ralit, les socits seraient plus particulirement sensibles la valorisation de leurs actions. Un regime switching model distingue le cours des actions en deux tats en fonction de la perception de leur valeur par les socits : un tat de sous-valorisation et un tat de juste valorisation, voire de sur-valorisation. Le modle dmontre que les socits rachtent massivement leurs actions en cas de chute des cours mais seulement si le cours est dj sousvaloris. A linverse, lorsque les actions sont juges quitablement valorises ou survalorises, une chute des cours ne motive pas les socits racheter plus dactions. Ce modle contribue mieux apprhender le comportement des socits en validant lhypothse de soutien de cours par les socits, mais il met galement en avant le fait que ce comportement nest pas constant dans le temps et est, avant tout, conditionn la valorisation de laction. Lautre angle choisi dans la thse pour tudier lhypothse de soutien de cours est danalyser le timing des oprations directes des socits et des oprations des contrats de liquidit, puis de comparer leur comportement durant deux priodes dextrmes variations de cours (positives et ngatives). Ces travaux sont particulirement instructifs car ils apportent un clairage nouveau sur le comportement des socits, au travers danalyses intra-journalires des interventions mais surtout parce que la priode tudie est trs rcente puisquelle inclut la priode de crise financire et conomique en 2008 et 2009. La plupart des jours dextrme baisse ont eu lieu en octobre 2008 suite la faillite de Lehman Brothers et des mesures dinterdiction des ventes dcouvert. Les modles utiliss montrent que les socits ont rachet leurs actions ds le dbut des sances de bourse, la quantit dactions quelles ont rachet est proportionnelle la quantit change sur le march, cependant, la variation de cours, dans la journe, nest pas un facteur dterminant. Linterprtation de ces rsultats est la suivante : les socits cherchent absorber, quantitativement, loffre excessive des vendeurs dactions sur le march. En revanche, les
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contrats de liquidit ont une approche diffrente. Ils sont trs sensibles aux variations de cours intra-journalires en ce sens que plus les prix baissent, plus ils rachtent. Ils oprent de manire complmentaire aux socits car ils visent contrebalancer la tendance baissire des cours en passant plus dordres dachat agressifs, de plus petite taille, que les socits. En rsum, en traitant le sujet partir dvnements rcents, les travaux mens dans la cadre de cette thse confirment lhypothse de soutien de cours par les rachats dactions des socits mais galement met en avant le rle des contrats de liquidit dans la stratgie de soutien de cours des socits. Troisimement, dans la dernire partie de la thse, le comportement des contrats de liquidit et leur impact sur la liquidit sont tudis. A ma connaissance, aucune tude acadmique jusqu prsent na port sur les oprations effectues par les contrats de liquidit, contrairement aux liquidity providers dEuronext Paris. Or, les contrats de liquidit doivent tre bnfiques aux marchs financiers pour que cette pratique de march puisse tre lgalement admise. Toute la difficult de cette troisime partie est quelle traite du comportement des contrats de liquidit sous langle de leur contribution en matire de liquidit. La littrature acadmique offre peu doutils standards mesurant lapport de liquidit par un investisseur. Une contribution majeure de la thse est de proposer diverses mesures, dans la troisime partie, notamment en tenant compte de la prsence des ordres du contrat de liquidit dans le carnet dordres et leur capacit absorber lagressivit des ordres passs par les autres participants. Les rsultats montrent que les contrats de liquidit ne se comportent pas comme des apporteurs de liquidit qui ne passeraient que des ordres passifs pour rduire la fourchette ou augmenter la quantit de titres proposs dans le carnet dordres. En ralit, les contrats de liquidit sont des acteurs qui tantt consomment de la liquidit tantt en fournissent. Ils
Page | 23

sapparentent plus des investisseurs assidus sur les marchs sans toutefois chercher systmatiquement rduire les cots de transaction des autres participants. En complment, un argument soutenu pour justifier la mise en place de contrats de liquidit sur les marchs dactions large capitalisation boursire est quils contribuent rduire la volatilit des marchs. Pour autant, ltude montre quil nen est rien. La volatilit est compltement indpendante des interventions des contrats de liquidit. Enfin, laccent est ensuite mis sur les dterminants des ordres agressifs passs par les contrats de liquidit. Un ordered probit model est construit partir de donnes intrajournalires pour identifier les facteurs dterminant lagressivit des ordres. Le rsultat le plus intressant est que la rentabilit intra-journalire de laction nest pas un facteur dterminant pour les ventes des contrats de liquidit alors quil est un facteur trs significatif pour les achats. Les contrats de liquidit achtent de manire agressive lorsque les cours des actions baissent. On retrouve bien lhypothse de soutien de cours formule dans la seconde partie de la thse. En rsum, la thse contribue galement mieux comprendre le comportement des contrats de liquidit. La stratgie de soutien de cours est nouveau confirme par une tude intra-journalire sur lagressivit des ordres passs. De manire gnrale, les contrats de liquidit ne fournissent pas plus de liquidit que nimporte quel autre investisseur du march et ne contribuent pas non plus rduire la volatilit sur les marchs les plus liquides.

5. PLAN DE LA THESE Un chapitre liminaire complte lintroduction en prsentant lvolution du cadre rglementaire des rachats dactions et en fournissant quelques statistiques gnrales sur les rachats dactions en France. Ensuite, la premire partie de la thse dveloppe, de manire classique, en deux tapes, une analyse de lhypothse dasymtrie dinformation avec, dans un
Page | 24

premier temps, une analyse du timing des interventions des socits sur le march, et dans un second temps, une analyse de limpact de ces interventions sur la liquidit. La deuxime partie de la thse porte sur lhypothse de soutien de cours construite sur la relation entre les rachats dactions et la rentabilit des actions notamment lors des priodes de variation de cours extrmes. La troisime et dernire partie de la thse, comprend une analyse dtaille du comportement des contrats de liquidit, de leur impact sur la liquidit et sur la rentabilit des actions. Les facteurs dterminant lagressivit de leurs ordres sont galement examins. Enfin, une conclusion propose les futurs axes dtude qui mriteraient dtre suivi au regard des rsultats dcrits dans la thse.

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Page | 26

Chapitre liminaire

Vous savez, dit Moser en touffant sa voix, qu'on l'accuse de soutenir la hausse par des achats considrables. Si l'Universelle joue sur ses propres actions, elle est fichue. Emile Zola LArgent, 1891

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Afin de mieux apprhender la complexit de la notion de rachat dactions lie au cadre juridique de cette pratique, ce chapitre liminaire dcrit, dans un premier temps, lvolution historique des rgimes rglementaires encadrant la pratique de rachat dactions en France en mettant laccent sur les rgimes en vigueur depuis 2003, priode sur laquelle portent les analyses menes dans le cadre de cette thse. Dans un second temps, des statistiques descriptives sont proposes afin de permettre au lecteur didentifier, partir de donnes chiffres, les enjeux lies aux rachats dactions au regard de leur poids dans les transactions sur le march mais galement des montants qui y sont consacrs par les socits cotes.

1. EVOLUTION DE LA REGLEMENTATION DES RACHATS DACTIONS Ds le XIXe sicle le fait quune socit mettrice dactions rachte ses propres actions tait mal peru et pour cette raison le rachat dactions avait t interdit. Le fait que la socit mettrice dtienne ses propres actions et devienne actionnaire delle-mme a longtemps t contestable. Cette perception est parfaitement illustre, dans le roman LArgent de Emile Zola, par le rle jou par les rachats dactions dans la faillite dune grande banque cote la Bourse de Paris qui est le sujet du roman : Outre qu'elle tait illgale, la situation pouvait devenir dangereuse, car l'exprience a montr que toute maison de crdit qui joue sur ses valeurs est perdue. En 1966, le lgislateur a tout de mme introduit des exceptions conduisant lattnuation de cette perception ngative de la pratique de rachat dactions. Ainsi, les dispositions des articles 215 et 216 de la loi du 24 juillet1966 permettaient aux socits, dans le cadre dune offre publique de rachat dactions (l OPRA ), de racheter leurs propres actions dans lobjectif deffectuer une rduction de capital non motive par des pertes. Aux termes de larticle 217-1 de la loi prcite, le rachat dactions tait galement permis aux
Page | 28

socits ds lors quelles faisaient participer leurs salaris leurs rsultats par attribution dactions et doptions dachat sur actions. Enfin, conformment aux dispositions de larticle 217-2, les socits pouvaient lancer des OPRA ayant pour but de mener des oprations de rgularisation de cours. En 1998, la Commission des Oprations de Bourse (la COB ) a confi une mission de rflexion sur le rachat dactions M. Esambert, membre du Collge de la COB. Le rapport tabli la suite de cette mission, dit Rapport Esambert , prnait un rapprochement de la pratique en France celle observable aux Etats-Unis, notamment dans la perspective doffrir aux socits franaises une plus grande souplesse dans la gestion financire de leurs fonds propres. De manire gnrale, le Rapport Esambert proposait de substituer au rgime dinterdiction de racheter, en vigueur lpoque, un principe gnral dautorisation assorti de procdures de rachat et dobligations lgales accrues en matire dinformation au march. Ce rapport a t approuv et les textes lgislatifs ainsi que rglementaires ont t modifis en consquence. La rforme rglementaire a connu un succs indniable puisque environ 400 programmes de rachat dactions ont t viss chaque anne. En 2004, la rglementation rgissant les rachats dactions a t harmonise au niveau europen avec lentre en application du Rglement CE n2273/2003 (le Rglement Europen ) portant modalits dapplication de la directive 2003/6/CE dite directive Abus de March , qui nonce les conditions de la mise en uvre dun rgime drogatoire aux socits rachetant leurs actions. Dans la mesure o mes travaux de recherche sont centrs sur une priode stalant de 2003 2009, les deux rgimes rglementaires en vigueur durant cette priode, savoir le premier rgime instaur la suite du Rapport Esambert et le second rsultant du Rglement Europen, sont dtaills.

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2. REGIME REGLEMENTAIRE EN VIGUEUR ENTRE 1998 ET 2004 Les propositions manant du Rapport Esambert ont t la principale source dinspiration de la rforme lgislative intervenue en juillet 1998. Ces propositions ont t reprises et introduites la fois dans le code de commerce et dans les rglements et instructions de la COB, puis dans le Rglement Gnral de lAMF.

2.1. Suites donnes au rapport Esambert Les principes gnraux de la rforme de 1998 ont t codifis aux articles L. 225-209 et suivants du code de commerce. Ainsi depuis 1998, les metteurs dont les actions sont admises aux ngociations sur un march rglement peuvent-ils librement acheter jusqu 10% de leur capital sur la dure dun programme de rachat et dtenir un nombre dactions qui ne peut excder 10% de leur capital. Ces actions peuvent tre acquises soit dans le cadre dOPRA soit directement au fil de leau sur le march. Ce nouveau rgime rglementaire a largi les possibilits dutilisation des titres rachets. Les actions peuvent tre acquises dans lobjectif : i) de les annuler, ii) de les attribuer dans le cadre de programmes dpargne salariale ou de plans de stock options, iii) de les conserver et de les revendre ultrieurement, iv) de les changer ou de les apporter pour financer une acquisition ou bien v) de rguler les cours de bourse. De surcrot, la COB a uniformis ses diffrents textes applicables en matire de rachat dactions. Les rglements n90-04 relatif ltablissement des cours et n98-02 relatif linformation diffuser loccasion des programmes de rachat dactions sont venus prciser et complter les prsomptions de lgitimit des interventions des socits sur leurs actions et

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poser le principe dune note dinformation, vise pralablement par la COB 3 , destine lassemble gnrale des actionnaires. En rsum, sous le rgime susvis, les socits ne pouvaient dtenir plus de 10% de leur capital et leurs interventions taient encadres par les rglements de la COB. Conformment aux dispositions de ces rglements, la quantit de titres achets quotidiennement par les socits tait plafonne et limpact des transactions sur les cours devait tre limit. De plus, en cas de publication dinformation sensible au march par les socits, celles-ci devaient sabstenir de racheter sur le march durant les quinze jours prcdent une telle publication.

2.2. Admission des contrats de liquidit En 2001, dans le cadre de son rglement n2000-06 et son instruction du 10 avril 2001, la COB a rvis et adopt la charte de dontologie de lAssociation Franaise des Entreprises dInvestissement (l AFEI 4). Ces deux textes structurent les rgles applicables dans le cadre dun contrat de liquidit conclu entre une socit cote et un prestataire de services dinvestissement le courtier. En vertu du contrat de liquidit et en application de la charte, le courtier intervient au nom et pour le compte de la socit sur ses actions, ayant pour objectif de rgulariser le cours de laction et de fournir de la liquidit au march. Les fonds et actions sont mis la disposition du courtier par la socit. Le courtier agit ensuite de manire indpendante et discrtionnaire sur le march, en fonction des moyens dont il dispose, de ses objectifs et du contexte de march.

Ultrieurement, la COB a amend, plusieurs reprises, la rglementation portant sur linformation diffuse au march en adoptant les rglements n2003-02 relatif linformation diffuser dans la note dinformation et dans le communiqu loccasion des programmes de rachat dactions et le rglement n2003-06 relatif linformation publie par un bilan annuel des programmes de rachat et lutilisation des produits drivs. 4 Devenue depuis lAMAFI.

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Dans la mesure o ces interventions sont rputes effectues par la socit elle-mmele courtier ntant que simple mandataire- le contrat de liquidit est rgi par la mme rglementation que les rachats dactions. Le rglement 2000-06 de la COB vient toutefois assouplir les critres de prsomption de lgitimit pour les interventions du courtier. Celui-ci nest, en effet, pas limit par une quantit de titres achets ou vendus contingente quotidiennement. Il nest pas non plus soumis aux contraintes dintervention portant sur les prix. Enfin, la priode dabstention ne sapplique pas ses oprations, tant entendu que toute communication entre la socit et le courtier est strictement interdite.

3. REGIME REGLEMENTAIRE EN VIGUEUR DEPUIS 2004 La Directive Abus de March ayant pour objectif dune part, dharmoniser le cadre lgislatif en matire dabus de march au sein de lUnion Europenne, et dautre part, duniformiser les rgles applicables aux rachats dactions et aux pratiques de march admises, est entre en vigueur le 12 avril 2003. La Directive Abus de March a t transpose en droit franais le 12 octobre 2004.

3.1. Rgime drogatoire des rachats dactions Le Rglement Europen portant sur les modalits dapplication de la Directive Abus de March en ce qui concerne les drogations prvues pour les programmes de rachat dactions est dapplication depuis le 13 octobre 2004. Il prvoit un cadre lgislatif unique autorisant les oprations de rachat dactions au regard de la dfinition des abus de march. Fixant les conditions techniques relatives lexcution des programmes de rachat, le Rglement Europen a limit les objectifs de ces programmes i) la rduction du capital, ii) la possibilit dhonorer des obligations lies des titres de crance convertibles en titres de

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proprit et iii) des programmes doptions sur actions ou autres allocations dactions aux salaris de la socit. Pralablement toute opration de rachat dactions, les socits sont tenues de communiquer au march le dtail de leur programme de rachat, en particulier, les objectifs du programme, le nombre maximal dactions acheter, le montant maximal consacrer aux rachats ainsi que la dure du programme. Durant la priode de rachat dactions, les socits ont lobligation de communiquer une information synthtique de leurs interventions au march et rapporter aux autorits de rgulation comptentes le dtail de toutes leurs oprations. Des contraintes dintervention sont galement imposes aux socits sur le prix dachat ainsi que sur les quantits de titres quelles peuvent racheter quotidiennement. En dpit de lexistence de certaines drogations, les ventes ne sont pas, en principe, autorises durant lexcution du programme de rachat. Enfin, des priodes dabstention doivent tre respectes les jours prcdents toute publication sensible de la socit. En conclusion, le nouveau cadre rglementaire en vigueur depuis 2004 parat plus restrictif que le rgime lgislatif franais antrieur. Les objectifs sont rduits, les ventes sont interdites et les contrats de liquidit ne sont pas prvus. Pour autant, les contraintes dintervention sont relativement similaires celles en vigueur en France durant la priode 1998-2004.

3.2.Pratiques de march admises Considrant la pratique des contrats de liquidit comme bnfique5 et contribuant au bon fonctionnement des marchs financiers, lAMF a, en application de la directive

Dcision du 1er octobre 2008 concernant lacceptation des contrats de liquidit en tant que pratique de march admise par lAMF.

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2004/72/CE du 24 avril 2004 portant modalits dapplication de la Directive Abus de March, reconnu les contrats de liquidit comme une pratique de march accepte . En ralit, cette directive permet chaque pays de faire reconnatre et autoriser toute pratique de march ds lors que celle-ci a un effet bnfique sur le march, au regard de son apport en liquidit, de sa transparence et notamment du renforcement de la confiance quelle peut donner aux investisseurs dans les marchs financiers. Les contrats de liquidit peuvent donc toujours tre mis en place par les socits mme sils ne sont pas explicitement viss dans le Rglement Europen. En outre, les interventions du courtier ne sont ni soumises aux contraintes de prix et de volume ni mme la contrainte dabstention dintervention avant la publication dinformation. De ce fait, ils ne bnficient que dune prsomption de lgitimit simple, tandis que les oprations de rachat dactions directement effectues par les metteurs bnficient dune prsomption de lgitimit irrfragable, au regard de la rglementation europenne en matire dabus de march. Une autre pratique de march admise consiste, pour une socit, racheter des titres en vue de les changer ou de les apporter pour financer une acquisition. Comme pour les contrats de liquidit, cette pratique de march a t accepte par lAMF et jouit dune prsomption de lgitimit simple, mme si les contraintes dintervention sont identiques celles stipules dans le Rglement Europen.

4. STATISTIQUES DESCRIPTIVES RELATIVES AUX RACHATS DACTIONS Les tableaux suivants fournissent des prcisions statistiques sur les rachats dactions en France, entre 2003 et 2009. Le premier tableau donne une indication sur la part des rachats dactions effectus directement par les socits dans le volume global des ngociations enregistres dans le march en 2003 et 2004. Le second tableau fournit des informations
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similaires pour les contrats de liquidit sur la mme priode. Le dernier tableau prsente en revanche lvolution des montants consacrs au rachat dactions et aux dividendes par les plus grosses socits cotes et lvolution des contrats de liquidit mis en place par ces mmes socits. Comme le met en vidence le Tableau 1 (cf. page 36), plus de la moiti des socits franaises cotes sur Euronext Paris ont fait approuver un programme de rachat dactions par leurs actionnaires et prs dun tiers (environ 200) de ces socits ont mis en uvre effectivement le programme. En cumul, la capitalisation boursire de ces socits reprsente prs de 1.000 milliards deuros fin 2003. Parmi les socits actives, un peu plus dun tiers ne font que racheter leurs propres actions et prs des deux tiers profitent de la possibilit qui tait offerte par la rglementation pour revendre galement leurs actions. Entre le 1er avril 2003 et le 30 septembre 2004, le nombre de transactions effectues directement par les metteurs slve prs de 400 000. Par jour, les metteurs participent environ 39 transactions par jour, soit environ 6% des transactions effectues sur le march. Sur la priode, les rachats effectus directement par les socits slvent 12,6 milliards deuros, soit 1,5 millions deuros en moyenne. La part des montants changs par les socits reprsente plus de 20% des montants changs.

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Tableau 1 : Statistiques descriptives relatives aux transactions effectues directement par les socits entre le 1er avril 2003 et le 30 septembre 2004
Nombre de socits ayant rachet des actions Nombre de socits ayant un programme de rachat dactions Nombre de socits franaises cotes sur Euronext Paris Nombre de socits buy-and-hold Nombre de socits buy-and-sell Capitalisation boursire cumule des socits ayant rachet des actions Nombre de rachats directs par les metteurs Nombre de ventes directes par les metteurs Part des transactions des metteurs dans les transactions enregistres Nombre de transactions moyennes quotidiennes par metteur Montant des rachats directs par les metteurs Montant des ventes directes par les metteurs Montant moyen des rachats quotidiens Part des rachats dans le volume chang total quotidien 199 356 694 73 126 993 milliards deuros 359 862 35 033 6,07 % 38,9 12,6 milliards deuros 770 millions deuros 1,5 millions deuros 20,76 %

Le Tableau 2 (cf. page 37) apporte des lments statistiques sur les contrats de liquidit et les transactions effectues en 2003 et 2004. Plus dun tiers des socits ayant un programme de rachat ont conclu un contrat de liquidit. En cumul, la capitalisation boursire de socits est assez faible, avec seulement 132 milliards deuros la fin de lanne 2003. Les contrats de liquidit sont prioritairement contract par les socits de petite taille. Pour autant, neuf socits ayant un contrat de liquidit faisaient partie de lindice CAC 40. Le nombre de transactions effectu par les contrats de liquidit se chiffre plus de 100 000 sur les dix-huit mois dtude. Par jour, les contrats de liquidit effectuent en moyenne environ 7 transactions, ce qui reprsente une part de march de prs de 11%.

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Tableau 2 : Statistiques descriptives relatives aux transactions effectues par les contrats de liquidit entre le 1er avril 2003 et le 30 septembre 2004
Nombre de socits ayant un contrat de liquidit actif Nombre de socits du CAC 40 ayant un contrat de liquidit actif Capitalisation boursire cumule des socits ayant rachet des actions Nombre de rachats par les contrats de liquidit Nombre de ventes par les contrats de liquidit Part des transactions des contrats de liquidit dans les transactions enregistres Nombre de transactions moyennes quotidiennes par metteur Montant des rachats par les contrats de liquidit Montant des ventes par les contrats de liquidit Montant moyen des rachats quotidiens Part des rachats dans le volume chang total quotidien 124 9 132 milliards deuros 60 596 46 550 10,8 % 6,98 301 millions deuros 200 millions deuros 4 672 euros 27,38 %

Les montants changs par les contrats de liquidit sont relativement faibles au regard des montants changs directement par les metteurs ; les achats ne reprsentant que 300 millions deuros contre 200 millions deuros de vente. Les montants moyens changs quotidiennement par les contrats de liquidit ne dpasse pas 5.000 euros, avec une part de march moyenne quotidienne, en valeur, de 27 % environ. Le Tableau 3 (cf. page 38) dcrit lvolution, entre 2003 et 2009, des montants verss sous forme de dividendes et sous forme de rachat dactions (effectues directement par les socits) par les 58 plus grosses6 socits cotes Paris. Comme le tableau le montre, les dividendes ont augment entre 2003 et 2007. Ils ont diminu de 16,5% en 2008 mais restent suprieurs en 2009, par rapport 2005.

Les 58 socits ont t dtermines par leur capitalisation boursire calcule au 31 dcembre 2009. Ltude tait initialement prvue sur un chantillon de 60 socits mais pour des raisons techniques lies la mise en place par Euronext du Single Order Book, les rachats dactions et les dividendes distribus par Arcelor-Mittal et Dexia sont exclus du primtre danalyse.

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Les rachats dactions des 58 plus grosses socits nont cess de diminuer entre 2003 et 2009. Entre 2003 et 2008, les rachats dactions ont baiss dun tiers environ. En 2009, les socits ont quasiment cess de racheter leurs actions. Paralllement, comme lindique la dernire ligne du tableau, on observe un doublement des souscriptions par les plus grosses socits des contrats de liquidit entre 2005 et 2009.

Tableau 3 : Evolution annuelle des rachats dactions et des dividendes verss par les 58 principaux metteurs cots sur Euronext Paris
2005 Montant des dividendes verss (en milliards deuros) Montant des rachat dactions (en milliards deuros) Nombre de contrats de liquidit 27,6 9,6 21 2006 33,2 8,4 22 2007 36,4 7,7 32 2008 30,4 6,5 38 2009 31,3 0,4 41

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Premire Partie

le systme qui consistait dissimuler dans les caisses de lUniverselle une certaine quantit de ses propres valeurs, une sorte de rserve de combat, qui lui permettrait de spculer, de se jeter en pleine bataille de Bourse, sil le fallait, pour soutenir les cours, au cas dune coalition de baissiers. Emile Zola LArgent, 1891

Cost in terms of Liquidity of Open Market Share Repurchases

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Abstract

The present paper investigates timing and execution of open market share repurchases and their impact on liquidity, according to the information asymmetry hypothesis. I use 20032004 market data from NYSE Euronext Paris and firms reports on repurchase programs provided by the French regulatory authority. The originality of this study consists of the fact that French firms were allowed to sell their shares under local regulations in force during the examined period. As demonstrated in the previous articles on the subject, I find that managers show timing ability in buying shares at a low price. Buy-and-hold firms behave as contrarians whereas buy-and-sell firms adopt a more opportunistic attitude by buying following the price drop and before price recovery and selling following a strong price increase. However, the selection models do not confirm the hypothesis of information asymmetry in the long-term perspective. Based on the intraday analysis of submitted orders, I provide evidence that liquidity deterioration emerges from firms order aggressiveness. Furthermore, liquidity deterioration is related to the weight of trades in a daily traded volume. The more the firms trade, the wider the spread is. In general, the evidence suggests that firms trades induce extra costs for shareholders, expressed as liquidity deterioration. Experimental propensity score matching method is used to estimate the cost of implementation of the share repurchase programs.

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Numerous studies have reported a steady growth in the popularity of open-market share repurchase programs, especially in the U.S. (Fama and French, 1999). According to Brockman and Chung (2001), between 1996 and 1998, the announcements of open-market repurchase programs approximately amounted to $550 billion, whereas only $15.8 billion were announced in 1985 (Cook, Krigman and Leach, 2004). This trend is not only specific to U.S. firms. The phenomenon has also been observed in France over the last decade. In fact, between 2000 and 2002, 40% of firms listed on the French stock exchange had put into place repurchase programs (Ginglinger and Hamon, 2007). Although share repurchase programs have been examined over the last thirty years, specific studies on their execution have only surfaced quite recently. Previous debates were mainly focused on potential substitutability between dividends and share repurchases, both considered as payouts to shareholders (Brealey and Meyers, 1984; Shefrin and Statman, 1984). Though, certain authors argue their equivalence with regard to tax rates paid by shareholders (Miller and Scholes, 1978), Barclay and Smith (1988) demonstrate that repurchases could not be completely substituted for dividends, particularly because, unlike dividends, open market repurchases imply some other costs. Indeed, they advocate that managers take advantage of the private information they hold to decide to trade. This information asymmetry deteriorates liquidity thereby increasing firms cost of capital and reducing shares market value. Despite these arguments, Grullon and Michaely (2002) highlights that open-market repurchases are the most common form the U.S. listed firms use to pay out their shareholders. Subsequently, researches were conducted on the informational content of repurchase programs announcements and on the long-term shares return. Stephen and Weisbach (1998), Ikenberry, Lakonishok and Vermaelen (2000), as well Jagannathan and Stephens (2003)
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observe that the market (Canadian and U.S.) does not react to repurchase programs announcements, but they find a negative relationship between the announcements and the prior shares return. Zhang (2005) sheds light on the fact that shares on the Hong Kong Stock Exchange show a superior return in long-term perspective. According to the above-mentioned authors, this result is consistent with information asymmetry arguments raised by Barclay and Smith (1988). Recently, the studies have focused on the implementation of the share repurchase programs and their impact on liquidity. Under specific U.S. regulations, the U.S. firms had no obligation to disclose information on their repurchases. Therefore, it was difficult to conduct accurate analyses since data on the programs execution was not available. That is the reason why Cook, Krigman and Leach (2004) used only voluntarily disclosed data. They examine the timing and market impact of repurchases realised between 1993 and 1994 by 64 firms. According to their survey, the most often cited reason to implement share repurchase program is the fact that managers believe the share is undervalued, and therefore represents a good investment. Compared to several nave accumulative strategies, they find that larger firms pay their shares at a low price whereas smaller firms pay at a relatively high price. Moreover, they advocate that firms repurchase their shares following a price drop this being consistent with the price support hypothesis, however they establish no evidence that firms repurchase before a price increase. Finally, they document that quoted spreads narrow during repurchasing days suggesting that firms contribute to liquidity. In sum, they are not able to prove the use of private information by managers. The second main study conducted on the execution of repurchase programs is Brockman and Chung (2001). Taking advantage of a more favourable disclosure regulation on the Stock Exchange of Hong Kong (SEHK), they investigate the information asymmetry hypothesis. Their first objective is to determine whether managers use private information to
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execute share repurchase programs or not. Like Cook, Krigman and Leach (2004), they compare the price paid by firms to the cost incurred following a nave accumulation strategy. They come to the conclusion that managers show timing abilities since the price paid is lower than the price resulting from a bootstrap strategy. Their second objective consists in ascertaining the impact of repurchases on market liquidity. Hence, they compare spreads and depths on repurchasing days to non-repurchasing days. They observe a significant reduction of liquidity during repurchasing days and conclude that open-market repurchases imply a cost expressed as deterioration of the liquidity. Lastly, they isolate the adverse selection component of the bid-ask spread and compare it to repurchasing days and non-repurchasing days. The increase of the adverse selection component when firms repurchase is recorded. The above analyses bring them to a double conclusion that: managers use private information and market participants are able to notice their presence and leave the market, as a consequence increasing the bid-ask spread and reducing the depth. To summarize, these two studies lead to similar findings on the managers ability to repurchase at a low price, but they reach contradictory conclusions regarding the impact on liquidity. However, the results in Cook, Krigman and Leach (2004) are weakened by the fact that data used was voluntarily provided by firms, and thus was not comprehensive and exhaustive enough. Other recent articles dedicated to the examined issue, such as Mc Nally, Smith and Barnes (2006), document a negative price impact of repurchases since 60% of trades are seller-initiated and produce evidence that repurchases provide a price support. Ginglinger and Hamon (2007) who study the execution of French share repurchase programs, find that repurchases have adverse effect on liquidity and reflect contrarian behaviour. By comparing the two opposite positions, I investigate the implementation of share repurchase programs in France in order to determine whether French managers use private
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information when they execute open-market repurchases or not. A distinctive feature of French repurchases is based on the existence of a liquidity component in repurchases objectives. Moreover, in comparison with the previous studies, French legal framework, confidential comprehensive data and different methodologies, on which I have the opportunity to base my study, constitute value-added of this paper. Indeed, French applicable regulations governing the share repurchase sets forth requirements concerning the trade disclosures, which are, considering their nature, intermediate between U.S. and Hong Kong regulations. French regulations also contain several particularly interesting characteristics in comparison with U.S. and Hong Kong regulations. For example, execution of repurchase programs is subject to shareholders prior approval given by means of resolution relating to objectives to be fulfilled by managers. Furthermore, firms are allowed both to repurchase and sell their shares. This last feature of the French regulation provides an interesting orientation of the analysis insofar as the behaviour of buy-and-hold and buy-and-sell firms can be examined and compared. In order to allow me to develop an in-depth analysis of the information asymmetry, the Autorit des Marchs Financiers (the AMF)7 authorized me to use exhaustive and detailed data on firms trades as well non-censored market data (recorded trades and submitted orders in the limit order book) from the NYSE Euronext Paris, the French stock exchange, covering the period from April 1, 2003 to September 30, 2004. It enables me to identify the precise timing of firms trades and their related orders. Thus, intraday analyses are conducted to measure precisely not only the timing of managers ability to buy and sell but also the impact of their orders on liquidity. This data allows me as well to develop some models and propose an experimental methodology as a complement to classical results.

The French financial market regulator, (former Commission des Oprations de Bourse), equivalent of U.S SEC.

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Results indicate that managers show ability to pay shares at a low price. On intraday, buy-and-hold firms behave as contrarians when the price decreases, whereas buy-and-sell firms buy following price drop but before price recovery. Buy-and-sell firms sell following a strong price increase. However, from long-term perspective the decision to repurchase does not seem to be related to any future price increase. The analysis of the impact on liquidity sheds light on a relationship between firms trades and liquidity deterioration. The model employed shows that the more the firms trade, the more the daily spread widens. On an intraday basis, although managers submit more limit orders than market orders, the spread widens immediately following the orders arrival. Finally, the assumption according to which market participants would leave the market following firms order arrival is not confirmed. In fact, evidence imply that managers seize the opportunities to minimize intraday costs. Furthermore, they seem to neglect impacts on liquidity while they implement firms share repurchase programs. An experimental matching method using propensity score shows that the spread would be lower by 5 cents on average during repurchasing days if firms did not repurchase. These results are consistent with Barclay and Smith (1988) on an added liquidity cost arising from the execution of share repurchase programs as opposed to dividends. They are also consistent with Brockman and Chung (2001) in terms of the liquidity deterioration. The present article is organized as follows. In Section 1, French regulations governing the share repurchase programs and structure of the data used, are described. Section 2 presents competing market-maker and information asymmetry hypotheses. Section 3 treats the univariate and multivariate methodologies adopted to analyze managers timing ability. Section 4 deals with the univariate and multivariate methodologies used to analyze impact on

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market liquidity. Section 5 discusses propensity score matching method and its results. Section 6 concludes.

1. French Legal Framework and Dataset 1.1. French Repurchase Regulations The relevant period of the present study is from April 1, 2003 to September 30, 2004. Therefore, the legal framework governing repurchase programs in France described in this paper covers this specific period. A comparative analysis of the legal frameworks in force during the relevant period in France and in the U.S and Hong Kong as described in Cook, Krigman and Leach (2004) and in Brockman and Chung (2001), shows numerous differences. Firstly, the difference concerns decision to be adopted in order to launch a repurchase program. According to Cook, Krigman and Leachs survey, it seems that, in the U.S., share repurchases are implemented on managers decision taken discretionarily, whereas in Hong Kong relevant repurchase programs are subject to shareholder prior approval. Similarly in France, decisions relating to the share repurchase program and its terms, in order to be valid and enforceable, have to be authorized by shareholders by means of resolution voted at the annual general meeting. Such repurchase programs are valid for a limited period of time equal to eighteen months from the date of its approval. The resolution authorises managers to implement share repurchase program and determines objectives assigned to managers which may include, inter alia, hedging stock options plans, reduction of capital, payment in shares for an external acquisition, reduction of price fluctuation (price stabilization), cash flow management or implementation of liquidity contracts. Managers are supposed to trade in order to meet these objectives. However, similarly to Hong Kong regulations, French regulations impose two rules commonly known as 10%
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rules. The first rule forbids firms to hold, at any time, more than 10% of the outstanding shares, whilst the second rule forbids firms to repurchase more than 10% of the shares issued at the date of the resolution approval and during the authorized period. Secondly, while implementing the repurchase program managers also have to respect an additional rule known as the 25% rule. This rule sets an upper limit of a daily quantity of repurchased shares depending on the firms size. For instance, for the largest French firms, the 25% threshold is calculated taking into account the volumes traded for three days prior to the repurchasing day, whereas for the smallest firms the period to be taken into account is extended to fifteen days. It should be underlined that according to applicable regulations, French firms are not allowed to repurchase during negative windows defined as a period prior to the announcement of annual reports or any announcements that may affect, either positively or negatively, share price8. Thirdly, the most interesting feature of French regulations is that firms are allowed to sell their shares, as opposed to U.S. and Hong Kong firms. Obviously, it does not mean that all firms sell their shares on the secondary market. As a matter of fact, it depends on objectives assigned to managers by shareholders. On one hand, if the objective consisting of repurchasing shares in order to reduce the capital is approved, managers are not allowed to sell shares; they have to follow an accumulative buy-and-hold strategy until they decide to reduce the capital. On the other hand, if the objective entails short-term cash flow management, managers may be encouraged to sell shares. Finally, French firms do not disclose their trades directly. French regulations impose an obligation on firms to submit a monthly report to the AMF detailing their trades on NYSE Euronext Paris. At the end of each month, the AMF collects hundreds of reports containing information on these trades such as, date, the brokers identity, orders direction (buy and
8

COB Regulation n90-04 relative to stock price determination.

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sell), quantity of shares and price or the daily average price9. Next, at the beginning of the following month, the AMF discloses on its website the quantities of shares bought and sold by each firm during the previous month; however, no information on trade prices or trading days is disclosed. By comparison, Hong Kong firms report their repurchases the following day while U.S. firms disclose their trades in their quarterly reports10. As of October 2004, European Regulation No. 2273/2003, aiming at harmonizing the European Union legislation in that particular field, has brought some major changes. Objectives of repurchase programs are limited to hedging stock options plans and reduction of capital. Liquidity contracts11 remain an accepted market practice previously admitted under regulations governing share repurchase programs in France. However, sales are no longer allowed during the implementation phase, except in some specific situations. Finally, firms are obliged to disclose their trades directly to the market every week. More specifically, such disclosures must include the information as to the trading day and the average traded price.

1.2.

Euronext Paris Market Structure

The French stock exchange, Euronext Paris, is an electronic order-driven market with a limit order book. An opening price is determined by a call auction at 9am. Next, prices are determined continuously depending on order flows from the opening call auction to 5.25pm12. A pre-closing phase starts at 5.25pm and lasts to 5.30pm where there is no transaction since the order flow fills the limit order book in order to determine the closing price by a call auction. At 5.30pm a closing price is quoted.

The structure of data is explained further in the next subsection. According to Cook, Krigman and Leach (2004), FASB and the Securities and Exchange Commission impose no obligation on firms to disclose repurchase details beyond the number of shares outstanding at quarter-end. Quarterly 10Q and annual 10K filings provide the only indication of repurchase activity. 11 A liquidity contract is a specific agreement described briefly in Section 3. 12 This description is available solely for stocks traded on a continuous phase. Other stocks are traded on a call auction phase, either once a day, at 3pm, or twice a day, at 10.30am and 4pm.
10

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During the continuous phase, a submitted buy (sell) limit order is executed when there is at least one sell (buy) order at the ask side (at the bid side) asking (offering) the same or a lower (higher) price. Should the opposite occur, the buy (sell) order remains in the limit order book. In principle, a non-executed order can be kept in the book for a year or shorter depending on the investors intention. During that period, the execution procedure gives priority to the price rather than to the time of the orders arrival. In 2007, a new service called internal matching service (IMS) was introduced. The brokers that subscribed to that service benefit from the priority that is given to price and to market members identity then to the time of the orders arrival.

1.3.

Data

The present study is based on the data covering the period between April 1, 2003 and September 30, 2004, or in total eighteen months. During the considered period, liquidity contractors operated under local applicable regulations exclusively, as the European Regulation became effective only in October 2004. Two types of data are used in order to examine the implementation of the liquidity contracts: firms trade data including repurchase programs reports and financial market data, both provided by the AMF. In respect to the first category, firms trades database is elaborated from the monthly reports submitted to the AMF which contain information on firms trades such as: date, brokers identity, orders side (buy or sell), quantity of shares and price or a daily average price (for multiple daily trades). This data is proprietary and confidential to the AMF. Table 1 provides a fictitious example of a monthly report. The vast majority of firms report only aggregated daily data, however several provide more detailed information, including

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information on every single trade. A small part of data included in repurchase program reports is relevant for the present study of liquidity contractors trades. As for as the second type of data is concerned, the regulator has at its disposal the NYSE Euronext Paris market data on submitted orders and recorded executed trades. This data is not censored and the most complete available on the French stock exchange. Table 2 demonstrates a fictitious extract of market data wherein one row corresponds to one trade. In this example, buyer coded 504 refers to the market member Socit Gnrale Securities. Client code 1 indicates that the buyer is a third party. In other words, the buy order is submitted by a client of the market member 504. Client code 2 means that the market member trades on the stock exchange on its own account. I develop an algorithm that consists of merging this data in order to identify firms trades in the market data. The following example illustrates the procedure: as can be seen, in the two first trades (rows) of Table 2, the buy order numbers, i.e. 235, are the same. Thus, the two first trades stem from the same buy order and must be aggregated as they have the same decision-maker. At this point, the identity of the decision-maker remains unknown. However, the aggregated quantities of shares (2,000 and 8,000) and prices (35.00 and 36.50) exactly match the figures of the first row reported in Table 1 (the volume-weighted average price of the two trades is exactly 36.20 and limits are also 35.00 and 36.50). Additionally, the broker reported by the firm is the same broker who bought the shares. Therefore, it can be assumed that these two trades in the market data correspond to firms trades since the price, the quantity and the brokers identity match perfectly. This algorithm has been applied to firms trades reported to the AMF.

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1.4.

Sample

The overall sample of firms trades reported to the AMF represents 506,260 trades, realized by 317 firms, amounting to 13.8 billion (12.9 billion in repurchases and 0.9 billion in sales) during the relevant period of eighteen months. However, this is not the sample studied in the present paper as it includes liquidity contractors trades executed on firms behalfs. Liquidity contracts are authorized by shareholders in the framework of the resolution relating to the share repurchase program. In fact, it is a contract whereby a listed firm empowers an independent broker to trade on behalf of and for the account of the firm in order to improve the liquidity of its own shares market. In practice, the broker, also known as a liquidity contractor, does not receive any orders from the firm but trades (buys and sells) independently. Trades executed by the liquidity contractor are deemed to be executed by the firm itself. Hence, firms that signed a liquidity contract have to report these trades to the AMF. Due to the fact that the decision to trade is not taken by managers but by brokers, these trades have been excluded from the present study. Putting aside liquidity contractors trades, the sample is composed of 394,895 trades (359,862 repurchases and 35,033 sales) representing 12.6 billion in repurchases and 770 million in sales. Table 3 presents a summary of statistics on the French sample.

2. Hypotheses This section takes a close look at the hypotheses tested in the present paper. They have been mainly suggested by Barclay and Smith (1988). Then, the main empirical results of the relevant literature are presented. Finally, a development of the hypotheses, taking into account the recent studies on informed investors behaviour in the order book markets, is suggested.

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2.1.

Competing Market-Maker vs. Information Asymmetry Hypotheses

Although some tax advantages have been identified, Barclay and Smith (1988) advocate that firms do not totally substitute open-market repurchases for cash dividends since added costs are associated with the execution of repurchase programs. These costs are related to the growth in activity of informed investors on the financial market. The above-mentioned authors document that when managers trade on the secondary market, the specialist responds by increasing the bid-ask spread, reducing market liquidity and thereby increasing the cost of capital. By comparison, dividends do not affect liquidity. In fact, two opposite hypotheses are confronted. In respect of the first hypothesis, managers are assumed to not hold information on a fair value of the shares. Thus, trades executed in the framework repurchase programs will have no predictable effects. By submitting limit orders, managers would even provide liquidity to the market. The bid-ask spread would reduce, and as a consequence would provide more liquidity to the market. They call this hypothesis the competing market-maker hypothesis. However, when managers are supposed to hold private information on the value of share, they are believed to use this information to execute repurchase programs, especially when shares are considered as undervalued. The presence of informed traders would affect the specialists price policy. Indeed, the specialist adjusts price to balance supply and demand. According to Easley and OHara (1987), what the specialist looses because of informed traders, he recovers from uninformed traders. Since the repurchase programs execution entails an increase of the proportion of informed traders, the specialist widens the bid-ask spread to maintain his earnings on the same level. This is the second hypothesis known as the information asymmetry hypothesis.

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2.2.

Empirical Results

Although the Stock Exchange of Hong Kong is an order-driven market, Brockman and Chung (2001) seek evidence that could corroborate one of these two hypotheses. Their first objective is to determine whether managers use private information or not. In fact, they compare the price of firms trades to costs suffered by a nave strategy. They conclude that managers show timing ability since the price paid is lower than the nave strategy price. Then, the effect of firms trades on liquidity is measured. They find that liquidity deteriorates when firms trade; the bid-ask spread widens while the depth reduces. According to these findings the execution of repurchase programs entails a cost arising from the deterioration of liquidity. Finally, they decompose the bid-ask spread to isolate the adverse selection component. Results show that the adverse selection component increases during repurchasing days. Brockman and Chung (2001) documents that managers use private information to implement repurchase programs, thereby affecting the market liquidity and creating a cost suffered by shareholders. Adapting these hypotheses to an order-driven market, they conclude that market participants leave the market fully or partially when they suspect the presence of managers. Likewise, Cook, Krigman and Leach (2004) compares the price of firms trades to several benchmarks representing nave accumulative strategies. They also find that managers possess timing abilities. However, the repurchase decision does not seem to be related to any future price increase. Then, they measure the effect on liquidity, as well; however, their findings are different. In fact, it is demonstrated that liquidity does not deteriorate contemporaneously in relation to repurchases; spread narrows during repurchasing days. Furthermore, they observe that repurchases attenuate the price impact of order imbalances. In general, the authors cannot confirm the information asymmetry but find evidence strengthening the competing market-maker hypothesis.

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Ginglinger and Hamon (2007) analyze French repurchases for a period from 2000 to 2002. They find that repurchases occur after a price drop. They also observe that the fall of price accelerates during repurchasing days and that firms follow a price support strategy with contrarian behaviour. Moreover, they find that liquidity deteriorates during repurchasing days. They came to a conclusion that repurchases stabilize prices and support the hypothesis according to which managers use private information.

2.3.

Some extensions of hypotheses

Barclays and Smiths hypotheses are based on a traditional assumption suggesting that informed investors submit market orders while non-informed investors submit limit orders. This theory has been recently challenged in papers such as Bloomfield, OHara and Saar (2005) and Kaniel and Liu (2006). They suggest that both informed and non-informed investors may submit not only market orders but also limit orders. Bloomfield, OHara and Saar (2005) show that in an experimental situation, informed investors tend to submit more limit orders than non-informed investors. In fact, liquidity is alternatively provided by both informed and non-informed investors. Kaniel and Liu (2006) confirm this position with a theoretical model according to which informed investors can also submit limit orders. They document that, for informed investors, the decision to submit a limit or market order depends on the time left to disclosure of private information they hold. They also conclude that limit orders can be informative. In fact, the original debate on open-market share repurchases vs. dividends may be summarized into two issues. First, comparing to dividends, do the open-market repurchases lead to an added cost for shareholders? To this question, Barclays and Smith (1988) respond affirmatively, so do Brockman and Chung (2001); the liquidity deterioration is an added cost. According to their findings, there is presumably a significant relationship between firms
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repurchases and liquidity deterioration. However, Cook, Krigman and Leach (2004) find no liquidity deterioration. The second issue concerns the causality: why do firms trades induce such liquidity deterioration? A traditional explanation is based on information asymmetry that could create unfavourable market conditions. Brockman and Chung (2001) explain the liquidity deterioration as a consequence of the use by the managers of private information that affects the adverse selection component of the spread. In reality, this issue is less factual than the first one. Indeed, a mere fact of being informed does not automatically lead investors to be impatient and aggressive; Bloomfield, OHara and Saar (2005) find that informed investors provide more liquidity than uninformed investors. In other words, managers private information would not automatically induce liquidity deterioration. As an illustration, McNally, Smith and Barnes (2006) find that 60% of firms repurchases are seller-initiated. Cook, Krigman and Leach (2004) findings do not provide evidence on existence of causality between managers timing ability (that would show private information) and market liquidity (that is not deteriorated). On the following pages, I propose to use two methods: the first method enabling to determine managerial timing ability and to investigate whether the repurchase decision takes into account the private information of future price evolution and the second method allowing to assess whether firms trades have a harmful impact on market liquidity. The intraday analysis provides interesting evidence on causality.

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3. Managers Timing Ability and Repurchase Decision In respect of the assessment of managers timing ability, a univariate analysis is used; the price paid by firms is compared to benchmarks. Furthermore, timing of repurchases and sales is observed in an intraday analysis. A multivariate analysis is employed to determine the decision to repurchase and sell from a long-term perspective.

3.1.

Managers Timing Ability

Cook, Krigman and Leach (2004) and McNally, Smith and Barnes (2006) use different nave strategies to compare the price paid. For example, they define the uniform strategy as consisting of buying the same quantity of shares every day at the closing price. They also use the as soon as possible strategy which measures the price paid when firms repurchase 100% of the traded volume from the beginning of the program until all desired shares are repurchased. Ginglinger and Hamon (2007) compare the VWAP during repurchasing days to average daily VWAP over several months before and after repurchasing days. Following Berkowitz, Logue and Noser (1988), the daily volume-weighted average price (VWAP) paid by firms for repurchases is compared to the daily VWAP observed on the market, measured by excluding firms repurchases. Such benchmark is supposed to be more representative than a single price, for instance closing price, since it may reflect better the real prices of a given day. However, in a second time, the daily VWAP of firms repurchases is also compared to the closing price on the same day. Table 4 presents the results. Panel A shows that the daily VWAP paid by firms is significantly lower in value (-0.043) and in percentage (-0.025%) than the daily non repurchase VWAP. Furthermore, the daily VWAP of repurchases is lower than the closing price on the same day; firms pay about 3 cents less than the closing price or -0.018%, it may suggest that managers have ability to apply a cost minimization strategy.
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As far as the buy-and-sell firms are concerned, the average return is measured over the complete period of eighteen months. This indicator is supposed to show managers ability to make positive profits; however, it must be used carefully since firms may hold shares before April 1, 2003 (share repurchase programs might have been set up before). Hence, average prices may be biased. To reduce this bias, sales are considered only when at least the same amount of shares has been repurchased between April 1, 2003 and the sales. Panel B of Table 4 shows a negative but not significant profit of about -1.75% for buyand-sell firms over the complete period of the analysis. Finally, an intraday analysis on return and timing is presented wherein return is measured from the opening to the firms trade (buy and sell) and from the trade to the closing. Since timing of trades is different, returns are time-weighted and related to the average timing of trades of each subcategory of firms. Panel C of the table provides interesting results. Buy-and-hold firms repurchase following a significant price drop trend (-0.10%) but the price continues to drop until the closing (-0.19%). This result shows contrarian behaviour consistent with Ginglinger and Hamon (2007) conclusions. However, buy-and-sell firms strategy is different since they repurchase following a price drop (-0.39%) but before the price partially recovers (+0.21%). Moreover, Table 4 shows that buy-and-sell firms sell following a strong price increase (+1.07%) while the price starts to stabilize after the trade and continues stabilizing until the closing, which suggests an opportunistic ability to sell. These results show that managers of both types of firms follow a cost minimization strategy with fair efficiency since the timing chosen by managers allows firms to pay shares at a low price regardless of the time period, whether eighteen months or intraday. However, managers of buy-and-sell firms do not show timing ability to make a positive profit in eighteen months. On an intraday basis, buy-and-hold firms behave as contrarians while buyPage | 57

and-sell firms behave opportunistically; they buy after a price drop and before the price recovers. Sales are also opportunistic since they occur after a price increase.

3.2.

Managers Repurchase Decision

The objective of this subsection is to identify the reasons leading managers to trade on a specific day rather than on another. In Cook, Krigman and Leach (2004) a left-truncated (or truncation from below) Tobit model is used to ascertain whether any private information on the future price is taken into consideration in the decision making process to trade or not. I also employ Tobit model to obtain comparable results with their study. In order to facilitate the comparison, a French repurchase sample is selected by truncating all negative repurchases (i.e. sales). The truncated Tobit model belongs to the models category wherein the dependent variable of interest is incompletely observed. The Tobit model is said to be truncated when observations of dependent variable and regressors are either unavailable or omitted for the purpose of the analysis. By comparison, the Tobit model is said to be censored when information on the dependent variable is limited while information on regressors is still available. Both models differ in the representation of the unobserved variable13. In practice, the Tobit model developed in Cook, Krigman and Leach (2004) is replicated with some minor modifications to determine managers decision to trade. The dependent variable is the net quantity of shares repurchased by firms. The following are independent variables: Volatility during the three days prior the repurchasing day (VOLj-3). This variable, measured as the variation of returns (in logarithm) during three days, is supposed to capture

For further explanations on differences between truncated and censored Tobit models, see Maddala (1983), Greene (2003) and Cameron and Trivedi (2005).

13

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the sensitivity of managers to volatility. When the volatility increases, the cost of shares is more uncertain. Managers may be then reluctant to trade on a volatile market. Three-day lag cumulative abnormal return (RENTCUMj-3). According to Cook, Krigman and Leachs model, the abnormal return is the difference between share return and market return. They use the S&P500 index as a proxy of market return. I use the SBF120 index, which includes the CAC40 index 14 and the 80 following largest firms on NYSE Euronext Paris. Returns are expressed in logarithm. This variable is supposed to capture the sensitivity of managers to previous share return. When the share price underperforms the market on the previous days, managers may increase repurchases either to support price or because they estimate that the share is undervalued. Three-day lead cumulative abnormal return (RENTCUMj+3). This variable is calculated like the previous one and is supposed to capture the information asymmetry. A positive correlation between net quantity of repurchased shares and this variable should be observed if managers use private information. Three-day lag cumulative trading volume (QTYCUMj-3). The trading volume is expressed in quantity of shares. Since the 25% rule restricts repurchases, managers may be sensitive to the trading volume during the three prior days. A positive correlation should be observed between this variable and the dependent variable. Relative spread and Quoted depth variations during the three prior days (RELSPREAD and DEPTH). Liquidity may influence managers decision to repurchase. On one side, according to importance of liquidity in repurchase programs objectives, managers may be concerned about liquidity shocks and submit orders to recover; thus, a positive relation might be observable with the relative spread, and a negative relation with quoted

The CAC40 index represents the 40 largest firms on NYSE Euronext Paris. It is the main share index on Euronext Paris.

14

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depth. On the other side, they may take advantage of a situation where the market is uncommonly liquid order to increase trades. Repurchases in the last three days (Dj-3). This dummy variable equals one if the firm has already repurchased during the three prior days. The question is to know whether firms repurchase during consecutive days or isolated days. Weekday (Dt). This limited variable is supposed to identify a favourite weekday of firms trades. Indeed, Harris (1986) shows that on Monday the market return is significantly negative while on Friday is significantly positive. Managers may take their decision based on this observation. Table 5 provides results controlled of heteroscedasticity. It is shown that an increase in volatility reduces repurchases. As expected, the traded volume during the three previous days has a positive effect on repurchased quantity. Although the spread is not a determining factor for repurchase, a deeper limit order book leads firms to repurchase. Finally, abnormal returns coefficients reveal that firms repurchase when price overperforms; price overperforms during the three days prior the repurchasing day, and still overperforms during the three following days. In this context, the information asymmetry hypothesis is not confirmed.

3.3.

Sample selection model for repurchasing decision

The previous model seems to be attractive, however it is not perfectly adapted to the study. As a matter of fact, the repurchases sample is not random and is intentionally constructed only from repurchases, excluding days when managers do not repurchase or sell. However, one can assume that the decision to trade a specific quantity of shares depends on the decision to trade itself. The Tobit model does not take into account a potential selection bias that may exist. As a consequence, the inference would be affected. That is the reason why I use a sample selection model in order to break down the managerial repurchase decision into
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two steps: beforehand, managers decide to trade; next, they decide on the net quantity of shares they repurchase. According to Amemiya (1985), this model is called the type 2 Tobit model 15 or bivariate sample selection model by Cameron and Trivedi (2005). The bivariate sample selection model is a system of two equations with a participation equation, also called selection equation, and a resultant outcome equation. Let and denotes the outcome of interest, which is the net quantity of repurchased shares,

the decision to trade (which equals one if the firm decides to trade and zero otherwise).

In the left-truncated Tobit model, the net quantity of repurchased shares is observed only when it is positive. The bivariate sample selection is a more general model introducing upstream a latent variable, equation. Then, , which captures the decision to repurchase with a probit ) is observed only if
0, meaning that the

(by way of latent variable

net quantity of repurchased shares is measured provided that managers decide to trade. The model is formulated as follows:
1 0 0 0

(1)

which is the selection equation. The outcome equation is:

0 0

(2)

The standard model specifies a linear model with additive errors for the two latent variables:

It is also called model with one probit selection equation by Wooldridge (2002) or Heckit model in the literature referred to in Heckman (1979).

15

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The truncated Tobit model described above is a special case where

. The

estimation of this sample selection model is obtained by the Heckmans two-step estimator. Since the selection equation is not a structural equation, it is not necessary to impose exclusion restrictions. Moreover, the OLS regression is inconsistent in this situation as error terms are assumed to be correlated and their covariance, , is different from 0, so is the from the probit
3

coefficient of correlation, . Thus, the first step consists in estimating selection equation:
,

In the first step, all observations estimated inverse Mills ratio,

. , is obtained, and then placed in the outcome equation:

, , ,

1, ,

are used. From this equation, an

4

where is the error term,

is obtained by the first step probit regression of

on

,and

the variance of error terms in the outcome equation16. In the second step, parameters of the outcome equation are assessed by OLS owing to the estimated inverse Mills ratio that acts as an added explanatory variable. The resulting estimator of 2 is consistent. In this step, observations used are selected according to the results obtained in the first step
1, ,

with

representing selected firms trades).

In the following model, I split the managers decision to trade. In concrete terms, the selection equation is a probit equation wherein the dependent variable is a bivariate variable that equals one when managers decide to trade and zero otherwise. Then, the outcome equation determines the net quantity of repurchased shares conditional on the trade decision.

16

By definition,

, since

1 by normalization.

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The regressors used in the sample selection model are identical to those used in the Tobit model presented above. However, in the outcome equation, only variables of cumulative abnormal returns are present. Table 6 presents the sample selection model results and must be confronted with Tobit model results in Table 5. As can be seen in Table 6, the decision to trade is positively related to the traded volume of the three prior days and negatively related to market volatility. Contrary to Tobit model, the decision to trade is positively related to the abnormal return during the three days before the repurchasing day, but negatively related to the future abnormal return. Finally, the quantity of net repurchased shares is neither related to prior abnormal return nor to future abnormal return. The difference of the results between this model and the previous Tobit model leads to a careful consideration of the results in the Cook, Krigman and Leach (2004) model. The sample selection model is more general and takes into account all days where managers could trade and did not. In reality, neither the sample selection model nor Tobit model highlight a potential use of private information by managers on this three-day horizon. To summarize, none of the models confirms the information asymmetry hypothesis. However, managers demonstrate timing ability to pay shares at a low price, not only in a quite long-time perspective (eighteen months) but also on an intraday basis. In the next section, the impact of repurchases on market liquidity is subject to an in-depth analysis.

4. Impact of Repurchases on Market Liquidity This section measures the impact of firms trades on liquidity. Description of orders submitted by firms is presented. Then, a univariate analysis depicts buy-and-hold and buyand-sell firms impact on liquidity. An intraday analysis and a regression model complement this section.
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4.1.

Univariate and Intraday Analysis

Brockman and Chung (2001) and Ginglinger and Hamon (2007) as well, find that liquidity deteriorates on repurchasing days compared to surrounding days. Like in the Bessembinder (2003) paper, in this section the analysis is conducted using time-weighting variables. From 9.05am to 5.25pm, spreads and depths are weighted by the amount of time that passes before the quote is updated. In the present study, repurchasing days or trading days refer to days where firms trade (buy and/or sell) to implement share repurchase programs. Liquidity of repurchasing days is compared to liquidity of non-repurchasing days. The nonrepurchasing days are the immediate days surrounding repurchasing days as long as these days themselves are not repurchasing days. Two categories of firms are distinguished following their strategies; buy-and-hold firms and buy-and-sell firms. Panel A of Table 7 presents results. As can be noted, liquidity on repurchasing days of buy-and-hold firms is not significantly different to liquidity on surrounding days (-0.019). By opposition, on buy-and-sell firms trading days spread significantly widens (+0.015). Overall, liquidity on trading days of both types of firms is not significantly different to liquidity on non-trading days (0.0088). These results differ from those presented in Ginglinger and Hamon (2007). The difference in the analysed periods may account for the dissimilarity in the results. . Data provided by the AMF and the algorithm presented in Section 1 allow to identify submitted orders by firms that implement share repurchase programs. Panel B of Table 7 contains the types of submitted orders in percentage with respect to all orders submitted by firms. The distinction between limit orders and market orders is made according to OddersWhite (2000)s principle consisting of focusing on the timing of the orders arrival. For a specific trade, if the buy order arrived earlier than the sell order, the buy order is called limit order while the sell order is called market order.
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As is displayed in Panel B of Table 7, buy-and-hold firms submit mainly (nearly 60%) limit orders. This result is consistent with Cook, Krigman and Leach (2004) and McNally, Smith and Barnes (2006) findings. Interestingly, buy-and-sell firms submit as many buy market orders as buy limit orders while they submit more limit sell orders (52.03%) than market sell orders. This confirms the difference in strategies adopted by both types of firms. The other interesting feature of Table 7 is that buy-and-sell firms orders stay longer in the limit order book (827.17 seconds for buy orders and 1,142.96 seconds for sell orders) than buy-and-hold firms orders (470.16 seconds)17. The objective of the first part of the intraday analysis is to compare the liquidity when firms orders are present in the limit order book to periods where they are not. Only firms orders arrived at or within the best quotes are selected since other orders have no impact on the best quotes. Then, spreads and depths are time-weighted to take into account the duration of the time of presence. Panel C of Table 7 presents results. It is shown that when both types of firms are in the limit order book the spread is narrower (-0.0438 for all firms) while the quoted depth is smaller than during the rest of the day (-5,775.1 for all firms). In general, the spread is narrower when firms orders are in the book. That statistic does not measure the immediate effects of firms market orders on liquidity. It only estimates liquidity provided by limit orders. The second part of the intraday analysis compares the market liquidity immediately following the orders arrival to market liquidity immediately preceding the orders arrival. This method measures immediate effect on liquidity of both types of orders. Obviously, market orders are expected to deteriorate liquidity whereas limit orders are expected to provide liquidity.

17

A t-test has been executed to compare the time of presence of all types of orders.

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Panel D of Table 7 provides findings. As displayed, although buy-and-hold firms submit more limit orders, their orders, taken as a whole, significantly deteriorate liquidity when they arrive in the limit order book (+0.002). The impact of buy-and-sell firms orders is less observable; the spread is not significantly different before and after the orders arrival. Finally, Brockman and Chungs conclusion with regard to the reaction of market participants is tested. According to these authors, liquidity deterioration during repurchasing days could be explained by the fact that market participants notice the presence of informed investors. Thus, they could be inclined to leave the market completely or partially, thereby widening the spread. To test this assertion, I compare liquidity before the arrival of firms orders to liquidity on the period following the orders arrival. If the above statement was to be confirmed, the spread would be wider following the orders arrival than prior to its arrival.. However, Panel E of Table 7 shows that the spread is narrower following the orders arrival (-0.0522) which suggests that the Brockman and Chung (2001) assertion does not hold. A conclusion that may be drawn from the above is that firms presumably deteriorate liquidity when they trade because they do not take into consideration the liquidity; first, in the decision-making process (ex ante) according to the selection models investigated in the previous section; and second, they disregard the effect their orders would have on market liquidity (ex post) once they are submitted. In any case, other market participants do not seem to leave the market following firms order arrivals.

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4.2.

Multivariate Analysis

Brockman and Chung (2001) and Ginglinger and Hamon (2007) develop a multivariate analysis including control variables in order to ascertain the impact of repurchases on liquidity. The dependent variable, the spread, is explained by control variables, which are: daily average share price, daily traded volume, daily volatility, and a dummy variable that is assigned value one when the day is a repurchasing day and zero otherwise. This model is replicated. However, I introduce a new factor which should have been discussed at the very beginning. According to these authors method, any trade realized by firms on a given day labels the day repurchasing day, regardless of number and size of trades. I believe that a mere fact that firms trade in the course of a day is not sufficient in itself to demonstrate that its trades have an impact on market data. Actually, what is important is whether firms trade one share or 100,000. Nevertheless, this issue is more complex since the key variable is the spread. If one wants to be as precise as possible, not only does one need to examine the firms traded volume but also the proportion of submitted market and limit orders. In that specific respect, three regression models are developed. Firstly, the original model is reproduced. Secondly, the volume traded by firms is added. Thirdly, a model with the proportion of submitted limit orders by firms as explanatory variable complements the analysis. The formal model is described as follows:

Variables are measured for repurchasing days and surrounding days (provided that they are not repurchasing days). Liquidity proxies are identically specified as in the univariate
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analysis. In the first model, REP is a dummy variable which equals one when the day is a repurchasing day and zero otherwise. P is the proportion, in percentage, of shares repurchased by the firms to all traded shares during the day. In the third model, PLO is the proportion, in percentage, of the quantity of shares asked by firms limit orders to the quantity of shares asked during the day. Price is the daily average price of all transactions in euros. Volume is the logarithm of the daily traded volume in euro. Volatility is the variance of returns during the day. Table 8 presents results corrected of heteroscedasticity of the three regressions with the quoted and relative spreads as dependent variables. As described in the table, control variables react as expected; the spread is narrower when the price is low. This is due to markets rules which adapt the tick size to the price. A higher price leads to a larger spread, in euros. The spread reduces as well when the traded volume increases. Lastly, volatility is positively correlated to spreads size. In the first model, the REP coefficient (0.0008) is not significant, contrary to the coefficient in the second model, which is positive and significant (0.0014). Finally,

the integration in the third model of PLO has no effect on liquidity. The above finding suggests that the spread widens when firms trade more. The simple fact that firms trade on a specific day has no significant impact on liquidity but the fact that firms represent a large proportion of trades on that day significantly deteriorates the spread. In France repurchases represent on average only 20.76% out of daily traded volume while 44.48% in Hong Kong according to the Brockman and Chung (2001). Liquidity deterioration, they observe, does not arise from market participants reaction but from aggressiveness of firms orders and a high proportion of firms daily trade. Since firms trades only account for 20% of daily traded volume in France, their impact on liquidity is probably more diluted than in Hong Kong where the proportion is twice as high.

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Finally, this finding suggests that the argument according to which repurchases programs entail cost as opposed to dividends is consistent. This cost takes the form of a liquidity deterioration that is undoubtedly caused by firms trades, like the intraday analysis reveals. Factually, aggressiveness of firms submitted orders accounts for liquidity deterioration. In the next section, I develop a matching analysis using propensity scores to determine the effect of the repurchase treatment on liquidity. In other terms, I measure to what extent the liquidity would have been different, if firms had not implemented their share repurchase programs.

5. Propensity Score Matching Method to Estimate the Liquidity Deterioration Matching methodology using propensity score presents a way to determine the cost of share repurchases programs. Firstly, I present the methodology following mainly Angrist and Kruger (1999) for the terminology; secondly its implementation to the execution of repurchases programs is described.

5.1.

Assumptions and Measures of Treatment Effect

The matching method and propensity score are mainly used in the pharmaceutical field and labour economics to identify the effects of a specific treatment, by way of comparison, on treated individuals and non-treated individuals,. Intuitively, one would like to compare the outcome lets say y, in the treated state and in the non-treated state. However, each individual of the sample is either treated or nontreated and not simultaneously in both states. It would be interesting to know to what extent the outcome of an average untreated individual would be affected had that individual been

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treated; formally, the purpose is to measure if the treatment is applied and zero otherwise.

, where D is a discrete variable which takes one

However, selection bias problem may occur. For example, treated individuals may not be randomly selected. In observational data, individuals either may choose to be treated or are simply treated due to other external reasons. As a consequence, the following assumptions have to be formulated: The first assumption is the conditional independence assumption according to which outcomes ( , the outcome of treated individuals and , the outcome of non-treated

individuals) are independent of treatment as long as the observable characteristics of individuals x:

, |

For example, this assumption is respected in case of random assignment to individuals. A weaker assumption is:
|

which implies the independence between the participation to the treatment and the outcome of non-treated individuals. It is called respectively the unconfoundedness assumption by Hirano, Imbens and Ridder (2004) and the ignorability assumption by Rubin (1978). The second assumption is referred to as the overlap or matching assumption and is necessary to measure impacts of treatment effects:
0 1| 1

It means that, for a given value of x, there might be treated and non-treated individuals. The reason why this assumption is called overlap is that an overlap occurs
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between treated and non-treated individuals sub-samples. In practical terms, for each treated individual a comparable non-treated individual with similar characteristics x is required to enable matching. The third assumption is the conditional mean independence assumption, which means that the outcome does not determine participation.
| 1, | 0, |

Two fundamental parameters are used in the treatment evaluation methodology. They are called respectively the Average Treatment Effect (ATE) and the Average Treatment Effect on the Treated (ATET) and are defined as follows:
| , | 1

The ATE measurement is relevant for randomly selected observations. The random assignment simplifies comparison between outcomes of treated and non-treated individuals. For observational data, the ATET is more relevant. The problem in treatment evaluation is that the average outcome of non-treated individuals ( ) provided that they are treated generate a control group respecting | , 1 is unobservable. The solution is to

0 . This control group must be constructed

from x in order to match the characteristics of the treated group and to respect the overlap assumption. The purpose of the procedure is to match treated individuals with control individuals based on their observable characteristics x. The exact matching is possible when characteristics are discrete variables. However, if they are continuous or if the characteristics

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vector has a high dimension, the exact matching becomes impractical and an inexact match is required. The propensity score is a solution to inexact matching.

5.2.

Propensity Score and Matching Estimators

When the sample is an observational sample, the propensity score is useful. It is possible to match on a basis of the propensity score, rather than on a basis of the characteristics x. According to Rosenbaum and Rubin (1983), the propensity score is the conditional probability of assignment on a particular treatment given a vector of observed characteristics (covariates), which is denoted p(x):
1|

where F(.) is the normal (if a probit regression is used) or logistic (if a logit regression is used) cumulative distribution function and h(X) is a function of covariates. Rosenbaum and Rubin (1983) state that the conditional independence assumption given x induces conditional independence assumption given p(x). Since it respects the above-presented assumptions, the propensity score should be used as a matching measure, albeit it raises several difficulties; i) the matching is done with replacement or not, ii) the number of units of control individuals used in the matching and iii) the matching method itself. The matching without replacement means that each observation of the control group is matched against only one treated observation, which is the closest one. The matching with replacement means that an observation of the control group can be matched against at least one treated observation. If one matches without replacement, the matching may not be very close in terms of p(x) and may increase the bias.

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The second issue is related to the number of units of comparison. If one compares one treated observation to the closest observation of the control group, the bias is reduced, but if one compares one treated observation to more control observations, though the bias may increase, the variance of this bias reduces. The overlap is a crucial point since if the two groups are similar in propensity scores, or if the control group offers a large possible comparison, then the matching will be much easier. The third element is the choice of the matching method. I present the Radius matching (or Caliper matching) which is the method used in this paper. The Radius matching enables to match (with replacement) one or more control individuals with the treated individuals. In the Radius matching method, all control individuals with a propensity score pj falling within a radius r are matched against the treated individual i. If the dimension of r is small, it is possible that some treated individuals are not matched because no control individuals have propensity score in his neighbourhood. However, the smaller the size of the neighbourhood,, the better the quality of matching. Formally, the Radius matching method is
6

where Ai(p) may be a vector depending on the number of control individuals in the neighbourhood.

5.3.

Repurchases as Treatment

The purpose of the matching is to estimate impact on liquidity of share repurchase programs. The results of the regression show that the spread widens during repurchasing days depending on the quantity of shares repurchased by firms. The matching method measures what would have been the liquidity during the repurchasing day if the firm had not

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repurchased, and whether liquidity proves to be different or not. The treatment is the fact that the firm trades during the day. In fact, I do not do one matching for the whole sample, but 373 matchings corresponding to the number of repurchasing days. For each repurchasing day, I find control individuals that are other firms listed on NYSE Euronext Paris. One of the conditions is that control firms shares are traded on a continuous phase over the day prior to the repurchasing day and they have not implemented share repurchase program. Another condition is that shares are traded at least 360 days during the analysed period. On average, for each repurchasing day there are about 11 treated firms and 106 control firms. For each repurchasing day, a propensity score is measured with a probit regression wherein the dependent variable, representing an act of repurchase, is a dummy variable which equals one for treated firms and zero for control firms. Explanatory variables are measured at the day prior to the repurchasing day. They enable to capture different dimensions of firms characteristics and shares market, such as size (market capitalization), autocorrelation of the trading activity (number of trades, average daily traded volume), price dynamics (daily volatility, average daily price) and autocorrelation of the liquidity (relative spread and average depth on the best quotes). The most important element of this probit model is not significance of estimators but the estimated probability or propensity score obtained for both types of individuals. Therefore, I apply the Radius matching method demonstrated above for each repurchasing day. It does not provide a matching for all treated firms, but only for those for which the propensity scores of treated and control firms are relatively close (r, in equation (6), is fixed at 0.01).

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The result of the Radius matching method reveals that the spread of repurchasing firms is significantly wider by about 5 cents (0.0509) than the spread of non-repurchasing firms, during repurchasing days. This number may be considered as relatively large. That is presumably due to the fact that almost all of the largest listed firms have put into place a repurchase program. It is therefore impossible to identify, for the largest firms, the control firms in order to carry out a comparison, whereas for mid and small caps, the control firms are numerous. On those markets, the spread is wider than on large caps. Thus, the impact of 5 cents concerns mainly mid and small caps. Despite this bias in the construction, the average extra cost paid by investors is consistent with the results obtained in the previous section.

6. Conclusion The purpose of this article is to provide an analysis of open-market share repurchases in France over a recent period. The fundamental issue is to determine whether the implementation of share repurchase programs induces costs of liquidity for the shareholders. The underlying argument is that the cost is presumably related to the information asymmetry between managers and other investors. Studies focused on implementation of shares repurchase programs (timing of trades and impact on liquidity) are rare and their findings are contrasted. For the purpose of this paper, 2003-2004 French sample including sales realized by firms is used. Moreover, the analysis is based on the intraday market data and repurchases data provided by the AMF and not at all available to the public. Managers show timing ability to pay a low price to repurchase shares. On intraday, buy-and-hold firms behave as contrarians, while buy-and-sell firms behave opportunistically buying following a price drop and before the price recovers, then selling following a strong
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price increase. However, on a longer period, the decision to trade does not seem to be related to any information on future price evolution. Additionally, impact on liquidity is identified. Although liquidity is not generally different during repurchasing days compared to non-repurchasing days, the intraday analysis of orders submitted by firms shows liquidity deterioration from a short-term perspective. The liquidity deterioration is not a consequence of the reaction of other participants leaving the market, as suggested in Brockman and Chung (2001), but is rather due to the aggressiveness of firms orders. The regression analysis confirms that the more the firms trade, the more the spread widens. Matching method using propensity score against non-repurchasing firms is applied. This experimental method estimates that the spread is 5 cents wider than the quoted spread of non-repurchasing firms. Finally, putting aside the information asymmetry, it appears that investors sustain the liquidity cost arising from the repurchase decision. This observation may prove useful in a debate on the advantages of repurchases compared to dividends, especially in view of the rapid growth of repurchases in the last decades.

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References

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Odders-White E., 2000, On the occurrence and consequences of inaccurate trade classification, Journal of Financial Markets, 3(3), pp. 259-286. Rosenbaum P. and Rubin D., 1983, The central role of the propensity score in observational studies for causal effects, Biometrika, 70(1), pp. 41-55. Rubin D., 1978, Bayesian inference for causal effects: the role of randomization, Annals of Statistics, 6(1), pp. 34-58. Shefrin H. and Statman M., 1984, Explaining investor preference for cash dividends, Journal of Financial Economics, 13, pp. 253-282. Stephens C. and Weisbach M., 1998, Actual share reacquisitions in open-market repurchase programs, Journal of Finance, 53(1), pp. 313-333. Wooldridge J., 2002, Econometric analysis of cross section and panel data, 1st ed., MIT Press. Zhang H., 2005, Share price performance following actual share repurchases, Journal of Banking and Finance, 29, pp. 1887-1901.

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Table 1: Fictitious example of a monthly report of repurchase shares program Table 1 constitutes an example of transactions reported to the AMF in the monthly reports. Date is the trading day. Broker refers to the Euronext market member selected by firm to execute its order. Side is the orders side, buy or sell (which can also be transfer, if the firm transfers shares to a manager, for example, when he executes stock options). Quantity refers to the quantity of shares. Price is the raw price paid for the shares, excluding commissions. Firms can report the price for each transaction (as shown in the second row) or a daily volume-weighted average price with the minimum and maximum prices executed (as in the first row).

Date 01/04/2004 02/04/2004

Broker Socit Gnrale Securities Crdit Agricole Cheuvreux

Side Buy Sell

Quantity 10 000 25 000

Price 36.20 (min : 35.00/ max : 36.50) 35.65

Table 2: Fictitious example of transactions recorded in the Paris stock exchange Table 2 is an example of the structure of Euronext Paris market data. ISIN code is the international ISO code assigned to identify shares. Buyer (Seller) code is the internal code assigned to identify each market member. Client code refers to the nature of the order initiator (1 for client account, 2 for proprietary account). Each individual order entered into the limit order book has a unique number (observable in the column Number of buy (sell) order). This number is reinitialized at the end of each day. Quantity is the quantity of traded shares and Price refers to transaction price in euro.

Date 01/04/2004 01/04/2004 01/04/2004

Buyer Number Number Seller Client Client (Euronext of buy of sell (Euronext Quantity Price code code code) order order code) FR0000133308 504 1 235 24 2 515 2 000 35.00 FR0000133308 504 1 235 267 1 559 8 000 36.50 FR0000133308 504 2 259 89 1 559 25 37.80 Market (ISIN code)

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Table 3: Summary Statistics of the Sample Table 3 presents summary statistics related to the dataset. 394,895 trades have been reported to the AMF. Number of firms is the number of the firms that effectively traded at least once during the 18-month period. Average market capitalization is calculated at the beginning of the analyzed period. Number of firms-trading day is a number of trading days where firms effectively traded. Repurchases as a percentage of the daily volume is calculated for days where firms effectively traded.

French sample Number of repurchases Number of sales Number of firms Average market capitalization1 Analyzed period 18 months Average daily trading volume2 Total repurchased value1 Number of firms-trading day Average daily value of repurchases2 Repurchases as a percentage of the daily volume
1 2

359,862 35,033 199 4.99 2003-2004 /

13.6 12.6 10,151 1.5 20.76%

In billion euro (). In million euro ().

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Table 4: Repurchase Price Comparison Panel A describes two methods of price comparison. The price paid for repurchases is weighted by a daily value of the shares repurchased by firms. This daily repurchase price is compared to two benchmarks; the daily VWAP (volume-weighted average price) of nonrepurchases and the closing price of the repurchasing day. Result is a difference between the daily repurchase price and the two benchmarks. Panel B presents returns obtained by buyand-sell firms trades. Return from average prices is measured in percent from average price paid and average price of sales on eighteen months. Sales made prior to repurchases are excluded. Panel C depicts an intraday analysis of returns. Returns are measured from the opening to firms trade and from the trade to the closing. They are time-weighted and related to the average time (from the opening) of firms trades. T-tests are used to test the significance of means difference and returns.

Panel A

In euro

In percent

Daily repurchases VWAP minus daily non repurchases VWAP Mean -0.043*** -0.05%***

Daily repurchases VWAP minus closing price Mean -0.03*** -0.018%***

Panel B - Return from average prices In percent Mean -1.75%

Panel C - Intraday analysis of return from opening to trade and from trade to closing Buy-and-hold firms Buy Opening to trade Trade to closing -0.10%*** -0.19%*** Buy -0.39%*** +0.21%*** Buy-and-sell firms Sell +1.07%*** -0.02%

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Table 5: Tobit model of daily repurchases Daily repurchases are estimated in a Tobit regression. As in Cook, Krigman and Leach (2004), the dependent variable is a daily quantity of repurchased shares. The regressors are VOLj-3 the volatility observed from three days prior to the repurchasing day (calculated with the variation of daily returns), RELSPREAD, the variation (in logarithm) of the relative spread between the third and the first day prior to the repurchasing day. DEPTH, the variation (in logarithm) of the depth at the best quotes between third and first prior to the repurchasing day. RENTCUMj-3, the cumulative abnormal return measured from three days prior to the repurchasing day in logarithm, QTYCUMj-3, a cumulative volume traded from three prior days, RENTCUMj+3, the cumulative abnormal return measured from the day following the repurchasing day until three days after in logarithm, Dj-3, a dummy variable which equals one if the firm repurchased during three prior days and zero otherwise. Dt is an ordinal variable which equals 3 to 6 for each weekday; the baseline is Monday (D2). Tuesday is D3 and so on. Quantities are scaled in 100,000.

Quantity of shares Intercept D3 D4 D5 D6 Dj-3 VOLj-3 RELSPREAD DEPTH RENTCUMj-3 RENTCUMj+3 QTYCUMj-3 -6.7163*** 1.1316*** 1.0946*** 0.1284 0.8551*** -0.6044*** -0.2388*** -0.0182 0.3326*** 0.1707*** 0.0652*** 0.1325*** 0.3702***
* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Table 6: Sample selection estimation of daily repurchases Daily firms trades are estimated in a sample selected model. The dependent variable is measured in quantity of repurchased shares. The selection equation is related to trade decision while the outcome equation is related to the quantity of shares repurchased (or sold). Regressors are VOLj-3, the volatility observed from three days prior to the repurchasing day (estimated by the variation of daily returns), RELSPREAD, the variation of the average relative spread between the third and the day prior to the repurchasing day in logarithm. DEPTH, the variation of the average depth at the best quotes between the third and the day prior to the repurchasing day in logarithm. RENTCUMj-3, the cumulative abnormal return measured from three days prior to the repurchasing day in logarithm, QTYCUMj-3, the cumulative volume traded from the three prior days, RENTCUMj+3, the cumulative abnormal return measured from the first day after the repurchasing day until the third day after in logarithm, Dj-3, is a dummy variable which equals one if the firm has been repurchasing during the three prior days and zero otherwise. Dt is an ordinal variable which equals from three to six for each weekday; the baseline is Monday (D2). Tuesday is D3 and so on. Quantities are scaled in 100,000.

Quantity of shares Outcome equation Intercept RENTCUMj-3 RENTCUMj+3 2 Selection equation Intercept D3 D4 D5 D6 Dj-3 VOLj-3 RELSPREAD DEPTH QTYCUMj-3 RENTCUMj-3 RENTCUMj+3 * Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level -2.0112*** 0.0318 0.0194 -0.0007 -0.0427 3.484*** -0.0171*** 0.0021 -0.0169 0.0007** 0.0116*** -0.0038** -0.0455*** 0.3652*** 0.0042 0.0045 1.0914***

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Table 7: Effects of firms orders and trades on liquidity

Table 7 presents the effects of firms orders on liquidity. Quoted spread is a daily timeweighted average spread in euro. Relative spread is a daily time-weighted average spread relative to the midquote in percent. Quoted depth is a time-weighted average depth at the best ask and bid in euro. Panel A measures the difference of liquidity during repurchasing days to surrounding days. Panel B describes a proportion of orders by category (limit or market) to the total orders submitted by firms. Panel C measures a difference of liquidity when firms are in the limit order book to the rest of the day. Panel D measures a difference of liquidity between the instant following firms orders arrival and the instant prior to the orders arrival. In Panel D, variables are not time-weighted. Panel E measures a difference of liquidity after and before firms orders arrival. T-tests determine the significance of differences.

Panel A Differences of liquidity proxies between repurchasing and surrounding days Buy-and-hold Quoted spread Relative spread Quoted depth -0.019 -0.153 676.31 Buy-and-sell 0.015** 0.067*** 265.8* All 0.0088 0.0229 266.749

Panel B Proportion of submitted orders by type with time presence Buy-and-hold Buy orders Limit orders Market orders Time of presence 56.87% 43.13% 470.16s Buy-and-sell All Buy orders 49.72% 50.28% 827.17s Sell orders 52.03% 47.97% 1,142.96s 54.6% 45.4%

Panel C Differences of liquidity proxies when firms are in the book and not (in intraday) Buy-and-hold Quoted spread Relative spread Quoted depth -0.032*** -0.0607*** -565.74 Buy-and-sell -0.0608*** -0.1184*** -7,061.4*** All -0.0458*** -0.0974*** -3,786.6**

Panel D Immediate differences of liquidity proxies between after and before the order arrival Buy-and-hold Buy-and-sell All Buy orders Buy orders Sell orders Quoted spread +0.002** +0.001 +0.007 +0.003*** Relative spread +0.004 +0.008 +0.026 +0.012** Quoted depth -5,014.2*** -5,527.04*** -3,627.3 -7,279.1*** Panel E Differences of liquidity proxies before and after orders arrival (in intraday) Buy-and-hold Buy orders Quoted spread -0.0848*** Relative spread -0.2964*** Quoted depth 8,650*** * Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level. Buy-and-sell All Buy orders -0.0448*** -0.1918*** 3,268.3*** Sell orders -0.0319*** -0.1189*** 2,013*** -0.0522*** -0.1635*** -5,270.3***

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Table 8: Regression of liquidity impact

Proxies of liquidity are measured for repurchasing days and surrounding days provided that the latter are not repurchasing days. Quoted spread is a daily timeweighted average spread in euros. Relative spread is a daily time-weighted average spread relative to the midquote in percent. REP is a dummy variable, which equals one when the day is a repurchasing day and zero otherwise. P is a proportion, in percent, of shares repurchased by the firms to all traded shares during the day. PLO is a proportion, in percent, of shares repurchased by limit orders to all repurchased shares by firms. Control variables are: Price, a daily average price of all transactions in euros; Volume, the logarithm of the daily traded volume in euros; and Volatility, a variation of intraday returns.

Quoted spread Buy-and-hold firms Intercept Volume Price Volatility REP 0.9444*** -0.0595*** 0.0028*** 0.0097 0.0008 0.0014*** 0.0014*** -0.00001 0.9*** -0.0573*** 0.0028*** 0.0088 0.899*** -0.0572*** 0.0028*** 0.0088 0.7986*** -0.0765*** 0.0097*** 0.1392*** 0.0091 0.001*** 0.001*** 0.0001 Buy-and-sell firms 0.7732*** -0.0745*** 0.0097*** 0.1402*** 0.7735*** -0.0746*** 0.0097*** 0.14*** 4.1852*** -0.2705*** 0.0042*** 0.8041*** -0.0062 0.0048** Buy-and-hold firms 4.0292*** -0.2628*** 0.0042*** 0.8004***

Relative spread Buy-and-sell firms 4.0179*** -0.2601*** 0.0041*** 0.7996*** 3.6823*** -0.253*** -0.0018** 0.8883*** 0.0769 0.0058*** -0.0013 0.007*** 0.0073*** -0.0005 3.5057*** -0.2389*** -0.0021*** 0.897*** 3.5041*** -0.2383*** -0.0021*** 0.8985***

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level

Deuxime Partie

Dabord, il navait fait que soutenir le cours avec prudence, revendant ds quil le pouvait, afin de ne pas trop immobiliser les capitaux et encombrer les caisses de titres. Mais il tait maintenant entrain par la lutte, et il avait prvu, ce jour-l, la ncessit dachats exagrs, sil voulait rester maitre du champ de bataille. Emile Zola LArgent, 1891

Open-Market Share Repurchase Programs and Price Support Hypothesis

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Abstract

The present paper examines price support hypothesis as incentive to implement share repurchase programs. Firstly, repurchases are compared to dividends in order to test the hypothesis of substitutability. Results show that repurchases are correlated with share price evolution conditional on share value such as perceived by managers. Indeed, repurchases accelerate when share price decreases but only if managers consider the price as undervalued. Conversely, repurchases are not related to share price evolution if managers consider share value as fair. Secondly, repurchases are analysed during the periods of extreme negative price shock, which took place in October 2008. Liquidity contractors (specific brokers trading on behalf of a firm) submitted orders in reaction to price drops in order to counterbalance the downward price trend, whereas firms submitted orders mainly to absorb the excessive quantity of shares bid on the market. Overall, results confirm the price support hypothesis. Supporting price is an incentive for repurchasing shares

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Share repurchase programs have been an increasing field of research for the last three decades. This is obviously related to a steady growth in the importance of open-market repurchases executed by firms. According to Brockman and Chung (2001), between 1996 and 1998 open-market repurchase program announcements in the U.S approximately amounted to $550 billion. However, in 1985 announcements represented only $15.8 billion (Cook, Krigman and Leach, 2004). Although in Europe repurchases were introduced later than in the U.S., Von Eije and Megginson (2008) demonstrate that they experienced a more rapid growth during the 1990s. For instance, in France, between 2000 and 2002, 40% of the Paris stock exchange listed firms had put into place repurchase programs (Ginglinger and Hamon, 2007). Between 2003 and 2009 French listed firms repurchases amounted to 87 billion. The academic literature on the subject cites various motives, which may conduce firms to implement share repurchase programs. Dittmars (2000) non-limitative list of reasons is of particular interest in a debate on substitutability between dividends and repurchases. Academic discussions focus on potential substitutability of both as payouts to shareholders (Brealey and Meyers, 1984; Shefrin and Statman, 1984). Although certain authors suggest their equivalence in terms of tax paid by shareholders (Miller and Scholes, 1978), Barclay and Smith (1988) demonstrate that repurchases cannot entirely be substituted for dividends, particularly for the reason that, unlike dividends, open-market repurchases involve some other costs. Indeed, they argue that managers take advantage of the private information they hold to decide to trade. This information asymmetry deteriorates liquidity thereby increasing firms cost of capital and reducing shares market value. Despite the above-mentioned arguments, Grullon and Michaely (2002) highlight that open-market repurchases are the most common form U.S. listed firms use to pay their

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shareholders. Furthermore, Jagannathan, Stephen and Weisbach (2002) show that dividends and repurchases are used in different ways and by different kind of firms. Dividends would increase steadily over time, while repurchases are said to be pro-cyclical and used as an extra payment for extra firms earnings. The flexibility inherent to repurchases compared to dividends would explain its growth to the detriment of dividends. Since share repurchase programs are considered as payoff, lots of researches focus on informational content of the repurchase programs announcements and on long-term share performance of repurchasing firms. According to these studies, market does not seem to react to such announcements. However, a negative correlation between the announcements and the prior share price performance is observed (Stephen and Weisbach, 1998; Ikenberry, Lakonishok and Vermaelen, 2000; and Jagannathan and Stephens, 2003). Based on this last finding, other authors formulate an assumption that firms use repurchases not only as a payoff but also as a method to support share price. As reported by Cook, Krigman and Leach (2004), the opportunity to repurchase shares at a low price is the main reason, cited by managers, encouraging them to implement share repurchase program. Zhang (2005), McNally, Smith and Barnes (2006), Ginglinger and Hamon (2007), and Keswani, Yang and Young (2007) confirm this price support hypothesis. According to price support hypothesis, not only share undervaluation is considered as a motive of repurchase, but also the fact that managers may influence on share price through price support strategy against a negative trend. This scheme is similar, to a certain extent, to a central bank intervention in its domestic currency market in order to counter a speculative attack. The price support hypothesis is also related to the aforementioned information asymmetry hypothesis. Managers would seize the opportunity to repurchase shares at the price they consider low with regard to the information they hold on future performance of the

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firm. Moreover, they might attempt to convey the information on what they may consider as a real value of share price when they judge it undervalued, to investors. Overall, the execution of repurchase programs during downward trends and negative extreme shocks periods could be different to their execution during normal periods. According to this hypothesis repurchases are presumably negatively related to share price evolution. Unlike other countries, in France the price support hypothesis should be carefully considered. French regulations allow brokers also known as liquidity contractors to trade on capital markets. Liquidity contractors are empowered by firms to provide liquidity on their share market. They trade almost every day with funding provided by firms. Formally, their objective is to provide liquidity. However, they also trade on blue chips in order to reduce price variation, as it is expressed in the charter. One may easily imagine the incentive for the price support strategy. Suppose managers are evaluated on the basis of share price performance or motivated by stock options. In this case, the question that arises is: would they not have used firms cash flow to repurchase shares for price support purposes? In reality, managers can only suggest putting into place repurchase programs. The final decision to implement such programs belongs to shareholders and is taken by means of a resolution approved at the annual general meeting. Nevertheless, once the repurchase program authorized, managers may decide on timing of trading. Managers could legitimately choose to implement the repurchase program at a moment that does not coincide with a cash flow increase but rather with a share price drop. In this specific respect, a study of repurchases during market downward trends and extreme shocks should also be conducted. In other words, repurchases are not presumably entirely correlated with firms cash flows. This notion would be inconsistent with the pro-cyclicality found by Jagannathan, Stephen and Weisbach (2002), but consistent with Fenn and Liang

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(2001) who find that increase of repurchases to the detriment of dividends coincides with the growing policy of stock options distribution. Considering the above, the first objective of the present paper is to examine the evolution of repurchases in recent years in France, particularly with regard to the performance of firm, to assess whether repurchases react in the same way like dividends to the same factors or not. The second purpose of the paper is to determine to what extent repurchases are correlated with share price evolution. Study of liquidity contractor operations is the third aim of this article. The last objective consists of illustrating the firms and liquidity contractors decision to trade during the period when shares were subject to extreme negative price shocks, particularly in October 2008. Overall, results show that determinants of the amount of dividends distributed by firms are not identical to the determinants of the amount of repurchases. Indeed, repurchases would be, to a certain extent, sensitive to share price evolution. Repurchases are related to share price evolution conditional on their value such as perceived by managers. A regime switching model shows that repurchases accelerate when share price decreases but only when the price is assumed to be undervalued by managers. Conversely, repurchases are not related to share price evolution if managers consider the share value as fair. They continue repurchasing according to their repurchase program. The obtained results confirm the price support as an incentive for repurchasing shares. Furthermore, liquidity contractors can be considered as a good complement to direct repurchases executed by firms. Indeed, they support prices during downward trends by adapting the quantity of repurchases with regard to the amplitude of the price drop. Their sales are not strongly related to price returns. In fact, they sell in order to balance their portfolio of cash and shares.

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Finally, during period of extreme negative price shock liquidity contractors were exclusively buyers. The intraday analysis shows that their decision to trade was strongly related to price drop as if they attempted to counterbalance the downward price trend. Unlike liquidity contractors, firms submitted orders mainly in order to absorb the excessive quantity of shares bid on the market. The article is structured as follows. Section 1 presents legal setting of repurchases and liquidity contractors. Section 2 provides an analysis using panel data model to estimate determinants of dividends and repurchases. The repurchase program implementation including liquidity contractor trades is described in Section 3. Section 4 estimates share price evolution as determinant of repurchases, using a regime switching model. Section 5 focuses on liquidity contractors behaviour, while Section 6 compares their behaviours during extreme negative price shocks. Section 7 concludes.

1. Legal Framework and Dataset 1.1 Repurchase Regulations The period under consideration in this paper is from 2005 to 2009. The presentation of the legal framework is with regard to that period. Until October 2004, repurchases were exclusively governed by French regulations. As of October 2004, share repurchase programs fall into scope of European Regulation No. 2273/2003 implementing the 2003/6/EC Directive as regards exemptions for buy-back programs and stabilization of financial instruments, (the European Regulation). The European Regulation is a part of a general European legislative framework for protecting the securities market integrity fixed in the Market Abuse Directive18.

Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation, which is more commonly known as the Market Abuse Directive

18

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Pursuant to provisions of the Market Abuse Directive, its prohibitions do not apply to firms trades when they repurchase their own shares provided that the trades in question are carried out in accordance with the following rules. Briefly, these rules state that firms are allowed to repurchase their own shares, but only for the purpose of meeting specific objectives such as reduction of capital, payment of financial debt exchangeable into equity and hedging stock options programs. Prior to the repurchasing, full details of the repurchase program, such as objectives or maximal amount to pay, must be approved by shareholders at the annual general meeting and publicly disclosed. Furthermore, during the repurchase program execution, aggregated information on transactions, such as trading day, average price paid and quantity of shares repurchased, has to be weekly disclosed. Additionally, according to provisions of the European Regulation, French firms must disclose their trades to the market every week. Likewise they must report monthly to the AMF19 the information disclosed weekly to the market, as well the information on brokers identity and full details of every single transaction. Besides the above-mentioned general requirements, while implementing share repurchase programs, firms must respect several conditions of trading. The first condition concerns price. Repurchases must be executed at a price lower or equal to the last trade price or to the current best bid price in the limit order book. The second requirement is with regard to daily-repurchased volume. In that respect, firms are allowed to repurchase up to 25% of the average daily traded volume calculated from the last 20 days preceding the repurchasing day. Finally, firms are forbidden from selling their shares. Nevertheless, some exceptions are allowed under specific conditions20.

Autorit des Marchs Financiers- the French financial market regulator- former Commission des Oprations de Bourse (the COB). 20 For these specific constraints, the reader will refer to the EC 2273/2003.

19

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Back to 2000, French regulatory authority put into place, for the first time, a new market practice. Indeed, within the regulations governing repurchases, the COB allowed firms to implement liquidity contracts subject to their prior approval by shareholders. Liquidity contract is an agreement whereby a repurchasing firm empowers an independent broker, called the liquidity contractor, to trade on behalf of and on the account of the firm in order to provide liquidity to its share market and to reduce the amplitude of intraday price variations. In 2004, considering the beneficial impact of liquidity contracts on markets, in terms of stabilization and liquidity provision, the AMF approved this practice and institutionalized it as accepted market practice within the terms of the 2004/72/EC Directive. Although such objective is not explicitly stated in the European Regulation, the AMF has been supporting this practice and liquidity contracts are valid and lawfully applicable by repurchasing firms. Interestingly, this specific market practice is not limited to France, as other European countries also implemented this practice. Spanish and Portuguese regulatory authorities recently approved liquidity contracts as accepted market practice. The Dutch regulatory authority has been also considering its acceptance. In practice, liquidity contractors trade independently without receiving any orders from the firm. However, their trades are deemed to be executed by the firm itself in the framework of the repurchase program. Yet, liquidity trades are governed by the same regulation as firms direct repurchases, the restriction in terms of price and volume does not apply to them. Moreover, liquidity contractors are allowed both to buy and sell the firms shares. Liquidity contractors trades must be reported to the AMF in the monthly repurchase report, however are not subjected to a weekly public disclosure. Balance sheet of the liquidity contracts including the amount of cash available and quantity of shares hold, is disclosed every six months.

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1.2. Euronext Paris Market Structure The French stock exchange, Euronext Paris, is an electronic order-driven market with a limit order book. Although several characteristics have changed since the Biais, Hillion and Spatt (1995) study, their findings present detailed and, to a large extent, still valid information on the French stock exchange structure and functioning. An opening price is determined by a call auction at 9am. Next, prices are determined continuously depending on order flows from the opening call auction to 5.30pm21. A preclosing phase starts at 5.30pm and lasts to 5.35pm where no transaction is recorded since the order flow fills the limit order book in order to determine the closing price by a call auction. At 5.35pm a closing price is quoted. During the continuous phase, a submitted buy (sell) limit order is executed when there is already at least one sell (buy) order on the ask side (on the bid side) asking (offering) the same or lower (higher) price. Should the opposite occur, the buy (sell) order remains in the limit order book. In principle, a non-executed order can stay in the order book for a year or shorter depending on the investors intention. Until November 2007, the execution procedure used to give priority to the price, then to the time of the orders arrival. As of November 2007, Euronext Paris introduced an internal matching service that gives priority to price, brokers identity and then, to the time of the orders arrival. In other terms, market members who subscribed to such service benefit from faster order execution.

21

This description is only available for stocks traded on continuous phase. The others are traded on call auction phase, once a day (at 3.00pm) or twice a day (at 10.30am and 4.00pm).

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1.3. Sample and Data In terms of the legal framework, the examined period corresponds to a harmonization phase of the legislation in the field of buy-back programs at the European level. Initially I built up the sample on the basis of the 60 largest firms listed on Euronext Paris, in December 2009, belonging to the CAC 40 or Next 20 indices. To avoid any bias, each firm has to be listed in 2005 and not to be a target of or an initiator of a large merger or takeover operation that could affect significantly the firms size and, especially its management structure. As an illustration, Gaz de France and Suez, both CAC 40 listed firms, have been excluded from the sample due to their announcement of a merger operation in 2006. Finally, only 49 firms respect the above-mentioned conditions and therefore are used in the sample. Table 1 contains a list of them. The sample represents about 49 billion of repurchases realized between 2005 and 2009 and accounts for 56% of the repurchases executed on the NYSE Euronext Paris during that period. Trades reported by firms to the AMF in the monthly reports are used to build up the database. These reports contain information on firms trades such as date, brokers identity, orders side (buy or sell), quantity of shares and price or a daily average price (for multiple daily trades). Table 2 provides a fictitious example of a monthly report. Most of the firms provide aggregated daily data but several transfer more accurate information, for instance, information on each trade. Other firms accounting information is collected in Bloomberg, while market data is provided by the AMF. The methodology used to merge firms data and market data is detailed in Section 6.

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2. Repurchases as Payoff to Shareholders This section focuses on the argument that repurchases, like dividends, constitute a payoff to shareholders. There are two hypotheses enabling to investigate this argument: either repurchases are a payoff that is similar to and can be substituted for dividends, thus affected by the same determinants such as firms performance, or repurchases are a payoff affected by different determinants. The former hypothesis refers to Modigliani and Miller (1961), who consider that, in theory, repurchases and dividends have the identical incidence on the shareholders revenues and firms value. The above considerations conduct to refer to the fundamental issue, which is the meaning of term substitution. Should it be understood as a changing distribution policy of excess return to shareholders with less and less dividends to more and more repurchases, according to Fama and French (1999) suggestion, or does it rather mean interchangeability between repurchases and dividends? On one hand, if the determinants are the same, the substitution can be understood as interchangeability, repurchases and dividends are only a form of payment to shareholders. It is not excluded that in the near future this observed trend is reversed. On the other hand, if firms structurally prefer repurchases, it would mean that repurchases procure managers with advantages that dividends do not. If this last hypothesis holds, it will mean that not only could repurchases be used by managers to pay shareholders but also for other purposes. Advantages of repurchases are presumably related to information asymmetry and price support. Managers would prefer to allocate cash to repurchase at a price lower than the one they consider fair and to support price during downwards trends. Like dividends, repurchases are expected to be correlated with firm performance. Guay and Harford (2000) demonstrate that repurchases offer more flexibility than dividend.

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Dividends would increase following a considerable permanent positive shock on cash-flows, whereas repurchases would increase following a temporary positive shock. As opposed to the above, the price support hypothesis suggests that repurchases could be negatively correlated to share price variation during the periods of business stagnation and especially during extreme negative shock periods. Thus, the first objective of this paper consists in constructing a model identifying and comparing the determinants of repurchases to those of dividends. If the same explanatory variables have similar power of prediction, it will mean that dividends and repurchases would be interchangeable and that the trend of growing popularity of repurchases to the detriment of dividends would be reversed. I employ a panel data model with annual data covering the period 2005 and 2009 in order to carry out this analysis. According to Skinner (2008), firms, which traditionally distribute dividends, continue distributing irrespective of implementation of repurchase programs. The author differentiates these firms from those recently founded that reached a size significant enough to distribute dividends, but prefer to pay shareholders only with repurchases. All firms in the sample have a longstanding tradition of dividend policy and, therefore belong to the first category defined by Skinner.

2.1. Definition of Panel Data Model Panel data22 is the observations on the same cross-section repeated several times on the same period. Nature of the data in-between cross-section and time series allows to reach a greater degree of precision of the estimation. Either the time series provides a dimension to accurate the cross-section analysis, or the cross-section dimension enriches the time series

22

For further explanations on panel data models, one may refer to Wooldridge (2002).

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analysis. Next, particular attention has to be paid to short panel data, which is the data built up on the basis of large cross sectional individual observation on a short period of time. Formally, a panel data model is formulated as follows:

This model allows cross sectional individuals to have different intercepts but the same slope for the explanatory variables. The intercept, among individuals. One of the models used in this paper is a panel data model with fixed effects (or individual-specific effects model). It treats correlated with the explanatory variables. An alternative to the fixed effects model is panel data with random effects. In such model, the unobserved individual effect, the regressors. In the random effects model, in the fixed effects model, | | depends on , is assumed to be random and uncorrelated with . Hence, . Thus, | as an unobserved random variable potentially , captures unobserved heterogeneity

. However, cannot be identified. | , it is

| ,

Although the individual effect is not identified in the conditional mean possible to estimate a consistent marginal effect of explanatory variables; The estimation solution consists in eliminating

with the methods such as the first

difference estimation. Due to its construction, this solution allows the identification of consistent for only time-varying regressors.

Finally, to determine whether the model fits better with fixed or random effects, a Hausman test is applied. If the unobserved heterogeneity is related to explanatory variables, then the of fixed effects model and random effects model should be different. Otherwise,

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the effects should be assumed as random. The Hausman test examines the null hypothesis according to which the individual-effects are uncorrelated with regressors.

2.2. Panel Data Model Applied to Dividends and Repurchases Recent papers investigate amounts of dividends and repurchases paid by firms. In the following panel data model, determinants used are the same as in Dittmar (2000). The explanatory variables are earningst-1 the annual profit made by firms during the t-1 year; turnovert-1, the annual business turnover recorded during the t-1 year and debt-on-equity ratiot-1 ,the long term firms debt on the common equity (market value) at the end of the t-1 year. That last variable identifies the leverage used by a firm to finance its activity. It can also be interpreted as firm solvency. Market-to-Book ratiot-1 is the relation between the market share price and the value of the firm assets, per share, at the end of the t-1 year. This variable captures firms expected growth and valuation of the shares. A high value may mean either that the share is overvalued or that market expects more profits due to the investment opportunities and future firm development. Conversely, a low value means that the share is undervalued or that the market does not expect the firm to generate more profits. It is observed in the Tobit model used by Dittmar that repurchases are positively correlated with earnings, but negatively correlated with debt-on-equity ratio and market-tobook ratio. If the price support hypothesis is valid, repurchases will be negatively correlated with turnover and earnings. They will be also negatively related to the market-to-book ratio. This may be explained not only by investment opportunities but also by the fact that this variable captures the market value of shares. Thus, repurchases should be implemented if the market value of shares is considered by manager as not satisfactory.

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In the panel data model, the explained variables are: Repurchasest, the annual amount of money paid by firms to repurchase shares during the t year, in million of euros and Distributiont, the annual amount of money paid by firms to remunerate shareholders with dividends during the t year, in million of euros. This model is expected to fit to repurchases, as in Dittmar (2000). Regarding dividends, the uncertainty remains. Indeed, according to Lintner (1956), dividends depend on the firms current earnings and, recursively, on the amount of the last dividend. The author also mentions a target payoff that firms seek to reach. Thus, dividends should be positively correlated with earnings and turnover. However, unlike repurchases, dividends are expected to have a negative correlation with the debt/equity ratio since this covariate entails a higher credit risk and a higher debt burden. If some investment opportunities have been identified, a given firm would not remunerate shareholders with dividends. As a result, market-to-book ratio should be negatively correlated to dividends. Results are presented in Table 4. The first model explains Distribution with the aforementioned determinants. As shown in Model 1, only turnover and earnings have an impact on dividends. Surprisingly, turnover has a negative impact, while earnings have a positive impact and respond better to expectations. Turnovers negative impact can be explained by the fact that firms may be inclined to maintain their long-term dividend policy despite a temporal turnover decrease. Model 2 shows that all variables constitute significant determinants of repurchases, opposed to dividends. Turnover has a negative impact on repurchases, while debt on equity ratio, earnings and market-to-book ratio have a positive impact. This finding differs from Dittmar results according to which if the market-to-book ratio increases by one point (by increasing the market value or decreasing the asset value, other things equal), dividends reduce while repurchases increase. Moreover, if debt on equity increases by one point (by

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increasing long-term debt, or decreasing equity market value, other things equal), repurchases increase as well. In reality, the results of Model 2 are consistent with the above-mentioned assumption that the repurchases are partly correlated to share price. In Model 3, the annual share price return during the t year is added. It seems that annual share price return explains perfectly repurchases 23. Finally, Hausman tests reject the random effects hypothesis suggesting that these explanatory variables depend rather on firms characteristics. These models highlight that earnings are unsurprisingly a strong determinant of both repurchases and dividends as already demonstrated in related literature. However, these models show that, unlike other explanatory variables, only turnover and earnings have similar impact on dividends and repurchases. A conclusion that can be drawn from the above is that repurchases are not a neutral substitute for dividends and seem to be negatively correlated with price returns. The price support hypothesis, which can allow to account for this imperfect substitution of repurchases for dividends, is analysed in the next sections of this paper.

3. Descriptive Figures of Repurchase The aforementioned introductory panel data models suggest that determinants of dividends and repurchases are different. This subsection presents illustrative figures of a potential relationship between repurchases and share price evolution. Moreover, liquidity contractor trades are also depicted in several figures. Figure 1 and Figure 2 present a monthly return of the main French index, the CAC 40, and monthly firms repurchases executed between January 2005 and December 2009. The CAC 40 displays three time periods. In respect to the first period, from January 2005 to June
23

Although the results are not displayed in the paper, it appears that dividends are not related to annual share price returns.

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2007, the index shows relatively continuous positive trend increasing by 50% to reach 6,000 points. The second period, from June 2007 to February 2009, reports a brutal drop by 55%, from 6,000 to about 2,700 points. The last period, from March to December 2009, shows an increasing trend to 4,000 points (+48%). The index displays a higher volatility from the middle of the second period until December 2009. Between January 2005 and November 2006, firms repurchases amounted to roughly between 10 and 20 millions of shares each month with some picks, like in May 2006. Then, in the first semester of 2007, firms significantly reduced the repurchases. Between July 2007 and September 2008, repurchases were massively executed with the highest pick hit during November 2007. Subsequently, repurchases dropped to a relative constant low level. Figure 3 describes the evolution of repurchases executed directly by managers and by liquidity contractors. Repurchases realized on a monthly basis by liquidity contractors are almost, at all times, lower than repurchases executed directly by firms, except for the specific periods such as five months of the first semester of 2007, particularly in May, during which liquidity contractors repurchases were higher than direct repurchases and then for the first seven months of 2009, especially in January 2009 (the highest pick). Overall, repurchases executed by liquidity contractors seem to increase slightly during considered period. Figure 4 and Figure 5 describe liquidity contractor trades evolution with comparison to evolution of the CAC 40 index for the period of 2005 to 2009. The net position of liquidity contractors is measured from January 2005 by calculating the difference between buy and sell trades. The real position may be quite different to the estimated one. The first graph shows that when a monthly price return is quite volatile, like in 2009, the behaviour of the liquidity contractors is not clear as they are able to sell a significant quantity of shares not only during downward trends (eg. October 2008) but also during positive trends (eg. February 2009).

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However, Figure 5 displays clearly relationship between the evolution of the cumulated position of liquidity contractors and the evolution of the CAC 40 index. During the first positive trend, liquidity contractors were net sellers of about 50 millions of shares in June 2007. The CAC 40 index peaked at the same time (May 2007). Then, in a perfect asymmetric way, they became net buyers of more than 20 millions of shares. It coincided with the CAC 40 index brutal drop at the end of 2008 and the beginning of 2009. Finally, until December 2009 liquidity contractors were selling shares while share price was increasing. During the last five months of 2009, liquidity contractors repurchased and sold almost the same quantity of shares every month. At the end of 2009, buys and sells executed by liquidity contractors balanced out. These figures strengthen the suggestion that the evolution of share price accounts for repurchases directly executed by firms. Moreover, this suggestion is probably more accurate for the trades executed by liquidity contractors. The next two sections of the paper present models using regime switching in order to explain repurchases by share price evolution and share value: firstly for the direct repurchases executed by firms, secondly for trades executed by liquidity contractors.

4. Regime Switching Model Applied to Repurchases 4.1. Switching Determined by Shares Price Return As observed in the abovementioned figures, repurchases seem to be related to share price evolution, in particular to a negative share price evolution. Compared to the trend from the period of January 2005 to June 2007 and to the trend following February 2009, repurchases increased during the downward trends, which occurred between July 2007 and February 2009.

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In order to test the potential relationship between repurchases and downward trends, a regime switching model is used wherein regimes are assumed to be defined on the basis of monthly share price returns. This model tests the hypothesis according to which price return influences repurchases in a different way conditional on a sign of the share price return, whether positive or negative. This regime switching model is a model wherein regimes are clearly defined:

In this model24, is:

0 1

0 . An alternative way to formulate the model 0 1

In other words, this model is structured as a set of two equations defined by a dichotomous variable, . This variable is observable thanks to the observation of price

returns. Literally, the model estimates the relationship between the explained variable and explanatory variables conditional on a sign of share price return. The dependent variable is the monthly Repurchased quantity (expressed in logarithm). The explanatory variables are the monthly shares price returns, the lagged monthly share price returns and the lagged repurchased quantity (also expressed in logarithm). Results are presented in Table 5. As shown, the repurchase decision is not affected by a current price decrease. It is rather related to the repurchases executed in the previous month. Price decrease does not encourage firms to repurchase a greater amount of shares. In fact, that

Regime switching models are explained in details in the next subsection that describes a more general regime switching model. For more explanations, see Maddala (1983).

24

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would mean that managers continue implementing the repurchase program, as it was initially intended. Conversely, when price increases the repurchased quantity is negatively correlated with share price return. That observation might be interpreted in the following way: managers would continue implementing the repurchase program, however their strategy would be adapted to the market trend. The incentive to repurchase shares diminishes after share price increase. That might suggest that the price increase eliminates, de facto, an incentive to repurchase. Yet the interpretation of the above results is not straightforward, they are not inconsistent with the price support hypothesis. In reality, price return may not be a key determinant in the decision-making process for repurchases. In the following subsection, the share value is used instead of the price return to determine monthly quantity repurchased by firms.

4.2. Switching Determined by Shares Valuation As observed in Figure 2, during the first semester of 2007 repurchases were relatively low compared to the previous period. The share price was increasing and reached a pick in May 2007. During the period under consideration, share price probably reached a value considered by managers as fair. Thus, assuming that the price support strategy determines a decision to repurchase, repurchases would not be necessary. Henceforth, a key factor in the repurchasing decision would be the share value rather than share price return. In other words, share price would determine the regime wherein managers repurchase or not, with regard to the value that is considered as acceptable by managers.

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The regime wherein the share price is overvalued or fairly valued would lead managers to stop repurchasing, whereas the regime, wherein the share price is undervalued, would lead managers to repurchase in order to support the price. The difficulty of such model resides in the fact that the fair price is unknown. However, Goldfeld and Quandt (1973) and Hamilton (1989) suggest a solution allowing to define the regimes and to calculate coefficients of explanatory variables. This model is a general version of the previous one. The main difference between these two models is that in the previous model the regimes were clearly identified, could

only be assigned two values, zero or one, and c was known (c value was 0). In this model, is the share price, hence known, while c can be considered by managers as a fair value of share. Due to construction of the model, the threshold c is unknown. The first regime is a regime wherein the share price is undervalued, while the second regime is a regime wherein the price is overvalued. Formally, the model is:

where

is an unknown coefficient the model estimates. The vector of error terms is

assumed to follow a normal independent and joint distribution. The problem is solved by using the D-method for switching regression by Goldfeld and Quandt (1973). It leads:
,

Similarly, for the second regime, it is as follows:

,

1 1

1
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where as follows:

. is the normal cumulative density function. The model can be reformulated 1 is the probability.

Unlike the abovementioned model, in the present model the In practice,

is determined endogenously based on the fact that the model is constructed

arbitrarily with two regimes and from an exogenous variable defined as the share price, which is assumed to generate these regimes. The dependent variable is the monthly Repurchased quantity (expressed in logarithm). The explanatory variables are the monthly shares price returns, the lagged monthly share price returns and the lagged repurchased quantity (expressed in logarithm). Results provided in Table 6 show that, in regime 1 the share price return coefficient is strongly negative. That means that in the event the price is considered as undervalued by managers, a decreasing share price trend leads firms to repurchase massively. The fact that they executed repurchases in the recent past does not affect their decision. As far as regime 2 is concerned, the price return does not have an impact on the decision to repurchase. In fact, the decision to repurchase is strongly related to the quantity of shares previously repurchased. Contrary to the model tested in the previous subsection, the findings of this model reinforce the price support hypothesis. This model highlights that market share value is a more important determinant in the repurchasing decision-making process. Managers are inclined to increase their repurchases massively when the price trend is negative and they consider the price undervalued.

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Results of the regime switching models demonstrate that supporting price constitutes a crucial element of the managers motivation in the share repurchase strategy. The next section takes a close look at the liquidity contractor trades.

5. Behaviour of Liquidity Contractors Using panel data models, I study liquidity contractors behaviour. As figures show, the quantity bought and sold by liquidity contractors seem to be related to share price returns. Formally, liquidity contractors trade on shares in order to provide liquidity but also to reduce price variations. This element would account for the relationship observed in figures. However, liquidity contractors are also supposed to balance their portfolio (positions in cash and shares) in order to be able to buy and sell without constraints. In the following panel data model, the monthly repurchased quantity is determined by the monthly shares price return and the difference between quantities of shares bought and sold during the last month (called net repurchases), and the liquidity contractors position calculated from the 1st January 2005. The quantity repurchased by liquidity contractors is expected to be negatively correlated with the current share price return. Liquidity contractors may operate as contrarians. By submitting buy orders when the prices decrease they provide liquidity and potentially reduce volatility. Symmetrically, for the same reason the quantity sold is expected to be positively correlated with the current share price return. The second and third explanatory variables used are the net repurchases over last month and position in shares. These variables capture the inventory problem that liquidity contractors would face. These variables would counterbalance the effects of the current monthly return. Indeed, liquidity contractors have a limited amount of cash and shares. They should attempt to balance their position in order to secure the opportunity to repurchase or sell

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whenever they need. Consequently, the fact that they repurchased a large quantity of shares over last month should influence negatively the quantity repurchased in the current month. The same pattern would apply for sales. However, this is not exactly what Figure 6 illustrates. Indeed, the figure shows that liquidity contractors do not seek to balance their position in shares month by month. Results are presented in Table 7. As expected, liquidity contractors buy more shares during downward trends. Moreover, the higher the quantity bought in the last month, the higher the quantity they repurchase in the current month. Finally, as in Figure 5, a high net cumulated position does not refrain liquidity contractors from repurchasing. Interestingly, results are quite different with regard to sell trades. The current return is not significant. It means that liquidity contractors do not behave as contrarians when they sell. The two lagged explanatory variables coefficients have opposite signs and present an unclear conclusion: the higher the quantity bought in the last month, the lower the quantity they sell in the current month. However, they sell a higher quantity of shares when their position is long. . In sum, it seems that liquidity contractors support prices during downward trends by increasing the quantity of shares they repurchase with respect to the amplitude of the prices drop.

6. Reactions to Extreme Market Shocks In the present section I analyse behaviour of firms and liquidity contractors over periods of extreme price shocks. These periods are defined as five days during which the daily price returns skyrocketed and five days during which the daily price returns plummeted, for each firm between 2005 and 2009. The same tests are used to compare firms and liquidity contractors reactions.

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Comprehensive French market data provided by the AMF is used and merged with firms data in order to carry out this analysis. The regulatory authority has NYSE Euronext Paris data on submitted orders and recorded executed trades at its disposal. Table 3 depicts a fictitious excerpt of market data wherein one row corresponds to one trade. In this example, buyer coded 504 refers to the market member Socit Gnrale Securities. Client code 1 indicates that the buyer is a third party. In other words, the buy order is submitted by a client of the market member 504. Client code 2 means that the market member trades on the stock exchange on its own account. The following example illustrates the algorithm used to identify firms trades in the market data. As can be seen in the two first trades (rows) of Table 2, the buy order numbers, ie. 235, are the same. Thus, the two first trades stem from the same buy order and must be aggregated since they have the same original decision maker. At this point, the identity of decision-maker is unknown. However, the aggregated quantities of shares (2,000 and 8,000) and prices (35.00 and 36.50) exactly match the figures of the first row reported in Table 2 (the volume-weighted average price of the two trades is exactly 36.20 and limits are also 35.00 and 36.50). Moreover, the brokers identity reported by the firm corresponds to the broker who bought the shares. Therefore, it may be assumed that these two trades in the market data correspond to firms trades since the price, the quantity and the brokers identity match perfectly. This algorithm has been applied to firms and liquidity contractors trades reported to the AMF during the analyzed period.

6.1.

Univariate Tests on Equality on Traded Quantities

The hypothesis of equal quantities of the shares repurchased directly by firms over the periods of extreme shocks is tested with a F-test. Table 8 presents results. As displayed, quantities repurchased directly by firms differ significantly depending on whether the shock is

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positive or negative. Firms repurchase much more during the five days of the lowest return than during the five days of the highest return. Liquidity contractors are expected to increase repurchases more during the days of the lowest return. The F-test applied to quantities repurchased by liquidity contractors leads to such conclusion. The same finding is valid for the sales. It emerges from the above that liquidity contractors do not sell during the days of the lowest return. Finally, the net position (the difference between daily repurchases and sales) is also significantly different. The F-tests confirm that liquidity contractors are definitely net buyers during negative price shocks and net sellers during positive price shocks. A more interesting factor, is intensity of the liquidity contractors reaction during such extreme shocks. Furthermore, another F-test is used to investigate whether intensity of repurchases during the five days of the lowest return is the same like intensity of sales during the five days of the highest return. In other words, this test compares the absolute value of repurchases to the sales over these periods. Although the coefficients are not as significant as in the previous F-tests, it transpires from the F-test that liquidity contractors repurchase a greater quantity of shares during negative price shocks than the quantity of shares they sell during positive price shocks. Other F-tests are constructed in order to compare the intensity of repurchases by firms to those by liquidity contractors realized over the periods of extreme shocks. On average, liquidity contractors repurchase more than firms during the five days of the lowest return. This is explained by the fact that most of the firms refrain from repurchasing, whereas most of the liquidity contractors continue trading during extreme days.

6.2.

Reactions in October 2008

The period of 2007 to 2009 was deeply agitated by several economic and financial crises. In 2008 world economy was enveloped in a financial panic caused by the following

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events: the subprime crisis and fall of housing market, principally in the U.S., Lehman Brothers collapse, a growing default risk on European sovereign debt, in particular on Greek government bonds. In September 2008, the investment bank, Lehman Brothers, went bankrupt giving rise to uncertainty over the state of the banking sector. Both the U.S. and European authorities of the financial markets had immediately reacted by taking several steps to address this crisis, such as prohibition of naked short-selling. The purpose of this paper is neither to describe the chronology of these events, that would be difficult to establish, nor to join the discussion on their causes. However it is interesting from the perspective of this paper to investigate behaviors adopted by liquidity contractors and firms in reaction to these negative shocks. On the whole, in October 2008, due to the general uncertainty, a large part of the shares belonging to the sample were affected by dramatic price drops. For 31 shares composing the sample October 6, 2008 is one of the five days of the lowest returns ever recorded between 2005 and 2009. October 10 and 15 of 2008 also belong to the five lowest daily returns for respectively 17 and 21 shares of the sample. Firms and liquidity contractors reactions over these three days are presented in an intraday analysis herein below. On October the 6th, only four out of the 31 firms belonging to the sample decided to repurchase shares. Regarding liquidity contractors, eight repurchased shares that day, whereas six on October the 10th and 7 on October the 15th (respectively two and three firms). Liquidity contractors did not sell over these three days. A conclusion that can be drawn from the above is that firms definitely refrain from repurchasing during this tense period while liquidity contractors continue repurchasing (those who decided to trade against the market trend). During the three-day period of October, the proportion of liquidity contractors and firms direct repurchases to the total traded volume is on average 2.96% and accounts for

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10,199 trades. This number stems from 5,715 orders submitted by firms and liquidity contractors (respectively 1,288 orders and 4,427 orders). Liquidity contractors submitted 3.4 times more orders than firms. 46.13% out of the liquidity contractors orders were aggressive these days (market orders), compared to 43.25% of aggressive orders submitted directly by firms. It emerges from a F-test25 testing the equality of the aggressiveness, that the equality hypothesis is rejected at 10% level. This observation can be related to the fact that liquidity contractors orders were significantly smaller26 than firms orders, respectively 12,829 and 37,381. A linear regression model constructed with intraday data is used to explain the aggressiveness of orders submitted by firms and liquidity contractors. Intraday data is split into slots of 30 minutes, from the previous days closing price to the current days closing price. The explanatory variables are the Total quantity of shares traded on the market (expressed in logarithm), the End-to-end slot price return, expressed in logarithm and a variable capturing the Distance between the current interval to the opening auction of the day. Results, presented in Table 9, show that firms tend to repurchase mainly at the beginning of the trading day presumably in reaction to press releases published before the opening. Their market and limit orders are related to the quantity traded on the market; the higher the traded volume, the higher the quantity demanded by firms. The intraday price variation is not a significant determinant for both types of orders. The results also demonstrate that firms seek to absorb the shock by reducing the quantity sold in the market but make no attempt at counterbalancing the current price trend.

25 26

The F-value of the test is 3.36, for a p-value of 0.0669. The F-value of the test is 156.47 for a p-value lower than 0.0001.

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This approach is quite different to liquidity contractors one. Similarly to firms liquidity contractors are inclined to repurchase at the beginning of the trading day. Both market and limit orders are related to the quantity traded on the market. However, unlike firms orders, liquidity contractors orders are, to a large extent, correlated with price drops: liquidity contractor repurchases increase when the price falls. n fact, liquidity contractors try to counterbalance price trend by submitting buy orders. Overall, liquidity contractors operated in a complementary way to firms during the three-day period of shocks. Liquidity contractors submitted more orders than firms but only buy orders, which were smaller and more aggressive. Moreover, liquidity contractors orders of both types of aggressiveness were presumably submitted in reaction to price drops while the aggressiveness of firms orders was not related to intraday price return. These findings suggest that firms strategy consisted of absorption of exceeding quantity of shares in the market while liquidity contractors strategy is to counterbalance the negative price trend.

7. Conclusion Given the increasing number of implemented share repurchase programs over the past years, I study evolution of firms repurchases in France between 2005 and 2009, in particularly with regard to the firms performance, comparing them to dividends. Results show that determinants of the amount of dividends distributed by firms and the determinants of the amount of repurchases are not the same. Repurchases are related to share price evolution depending on whether managers perceive market share value as fair. Indeed, repurchases accelerate when share price decreases but only when managers assess the price as undervalued. Conversely, repurchases are not correlated to share price evolution when managers consider the share value as fair. In this last case, they continue repurchasing according to the repurchase program.

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Overall, the obtained results confirm the price support hypothesis. In fact, supporting price is one of the predominant objectives conducing managers to implement repurchase programs. Moreover, the price support hypothesis seems to confirm the possibility to substitute dividends for repurchases. Liquidity contractors trades can serve as a good complement to firms direct repurchases in order to support price strategy. Indeed, they support price during downward trends by adapting the quantity they repurchase with regard to the amplitude of the price drops. However, it does not imply that liquidity contractors attempt to balance their portfolio in cash and shares. During the extreme negative price shocks occurred in October 2008, liquidity contractors executed only buy trades, which were smaller and more aggressive compared to firms orders. Certainly, their orders were submitted in reaction to price drops, as if they sought to counterbalance the downward price trend. Regarding firms, they adopted an opposite strategy. Their orders were submitted mainly in order to absorb the excessive quantity of shares bid on the market. The findings of the present study are not without interest for shareholders since the price support strategy may be considered by them as a form of protection against share price drops. Likewise, they may also prove to be of particular relevancy for financial regulatory authorities in other European Union countries, which have been considering acceptance of such market practice in their local financial markets.

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References

Barclay M. and Smith C., 1988, Corporate payout policy: cash dividends versus open-market repurchases, Journal of Financial Economics, 22, pp. 61-82. Brealey R. and Meyers S., 1984, Principles of corporate finance, 2nd ed., McGraw-Hill. Brockman P. and Chung D., 2001, Managerial timing and corporate liquidity: evidence from actual shares repurchases, Journal of Financial Economics, 61, pp. 417-448. Cook D., Krigman L. and Leach J., 2004, On the timing and execution of open market repurchases, Review of Financial Studies, 17 (2), pp. 463-498. Dittmar A., 2000, Why do firms repurchase stock?, Journal of Business, 73 (3), pp. 331-355. Fama E. and French K., 1999, Disappearing dividends: changing firm characteristics or lower propensity to pay?, Journal of Financial Economics, 60 (1), pp. 3-43. Fenn G. and Liang N., 2001, Corporate payout policy and managerial stock incentives, Journal of Financial Economics, 60 (1), pp. 45-72. Ginglinger E. and Hamon J., 2007, Actual share repurchases, timing and liquidity, Journal of Banking and Finance, 31, pp. 915-938. Goldfeld S. and Quandt R., 1973, A Markov model for switching regressions, Journal of Econometrics, 1 (1), pp. 3-15. Grullon G. and Michaely R., 2002, Dividends, shares repurchases, and the substitution hypothesis, Journal of Finance, 57 (4), pp. 1649-1684. Guay W. and Harford J., 2000, The cash-flow permanence and information content of dividend increases vs. Repurchases, Journal of Financial Economics, 57 (3), pp.385-415. Hamilton J., 1989, A new approach to the economic analysis of nonstationary time series and the business cycle, Econometrica, 57 (2), pp. 357-384. Ikenberry D., Lakonishok J. and Vermaelen T., 2000, Stock repurchases in Canada: performance and strategic trading, Journal of Finance, 55(5), pp. 2373-2397. Jagannathan M., Stephens C. and Weisbach M., 2002, Financial flexibility and the choice between dividends and stock repurchases, Journal of Financial Economics, 57, pp. 355384. Jagannathan M. and Stephens C., 2003, Motives for multiple open-market repurchases programs, Financial Management, pp. 71-91. Keswani A., Yang J. and Young S., 2007, Do share buybacks provide price support? Evidence from mandatory non-trading periods, Journal of Business Finance and Accounting, 34 (5-6), pp. 840-860.
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Maddala G., 1983, Limited-dependent and qualitative variables in econometrics, 1st ed., Cambridge University Press. McNally W., Smith B. and Barnes T., 2006, The price impacts of open market repurchases trades, Journal of Business Finance and Accounting, 33, pp. 735-752. Miller M., and Scholes M., 1978, Dividends and taxes, Journal of Financial Economics, 6, pp. 1031-1051. Miller M. and Modigliani F., 1961, Dividend policy, growth, and the valuation of shares, Journal of Business, 34 (4), pp. 411-433. Shefrin H. and Statman M., 1984, Explaining investor preference for cash dividends, Journal of Financial Economics, 13, pp. 253-282. Skinner D., 2008, The evolving relation between earnings, dividends, and stock repurchases, Journal of Financial Economics, 87, pp. 582-609. Stephens C. and Weisbach M., 1998, Actual share reacquisitions in open-market repurchase programs, Journal of Finance, 53(1), pp. 313-333. Von Eije H. and Megginson W., 2008, Dividends and share repurchases in the European Union, Journal of Financial Economics, 89, pp. 347-374. Wooldridge J., 2002, Econometric analysis of cross section and panel data, 1st ed., MIT Press. Zhang H., 2005, Share price performance following actual share repurchases, Journal of Banking and Finance, 29, pp. 1887-1901.

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Table 1: Firms sample

Accor Air France Air Liquide Axa BNP Paribas Bouygues Cap Gemini Carrefour Credit Agricole Casino Guichard CNP Assurances Danone Dassault Systemes Dexia EADS EDF Eiffage Eramet Essilor International France Telecom Gophysique Hermes International Klepierre Lafarge Lagardere

LOreal LVMH Neopost Nexans Pernod Ricard Peugeot PSA PPR Publicis Renault Sanofi Aventis Schneider Electric Scor SES Global Societe Generale Sodexo St Gobain Technip TF1 Thales Total Vallourec Veolia Environnement Vinci Vivendi

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Table 2: Fictitious excerpt of a monthly report of share repurchase program

Table 2 is an example of trades reported to AMF in the monthly reports. Date is the trading day. Broker refers to the intermediary (Euronext market member) selected by the firm to execute its order. Side is the orders side, buy or sell (which can also be transfer, if the firm transfers shares to a manager, for example, when he executes stock options). Quantity refers to the quantity of shares. Price is the raw price paid for the shares, excluding commissions. Firms can report the price for each trade (as shown in the second row) or a daily volumeweighted average price with the minimum and maximum prices executed (as in the first row).

Date 01/04/2004 02/04/2004

Broker Socit Gnrale Securities Crdit Agricole Cheuvreux

Side Buy Sell

Quantity 10 000 25 000

Price 36.20 (min : 35.00/ max : 36.50) 35.65

Table 3: Fictitious excerpt of transactions recorded in the Paris stock exchange

Table 3 is an example of the structure of Euronext Paris market data. ISIN code is the international ISO code assigned to identify shares. Buyer (Seller) code is the internal code assigned to identify each market member. Client code refers to the nature of the order initiator (1 for client account, 2 for proprietary account). Each individual order entered into the limit order book has a unique number (observable in the column Number of buy (sell) order). This number is reinitialized at the end of each day. Quantity is the quantity of traded shares and Price refers to transaction price in euro.
Buyer Number Number Seller Client Client (Euronext of buy of sell (Euronext Quantity Price code code code) order order code) 504 1 235 24 2 515 2 000 35.00 504 1 235 267 1 559 8 000 36.50 504 2 259 89 1 559 25 37.80

Date

Market (ISIN code)

01/04/2004 FR0000133308 01/04/2004 FR0000133308 01/04/2004 FR0000133308

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Table 4: Panel data model on determinants of dividends and repurchases

A panel data model is used to determine the amount of dividends distributed by firms and the amount of cash used to repurchase their shares. Dividendt is the annual amount paid by firms to remunerate shareholders, in million of euros. Repurchasest is the annual amount paid by firms to repurchase their shares, in million of euros. Turnovert-1 is the annual business turnover recorded for a financial year. Debt on equity ratio t-1 is the proportion of long-term firms debt to the common equity. Earnings t-1 is the annual profit made by firms. Market-toBook ratiot-1 is the proportion of the market share price to the value of the firms asset per share. Price returnt is the shares price return during the year t, expressed in logarithm. A Hausman test is used to control the consistency of fixed effects.

Distribution with fixed effects Model 1 Intercept Turnovert-1 Debt on equityt-1 Earningst-1 Market-to-book t-1 Price returnt Hausman test 21.23*** -0.0077** 0.0751 0.1269*** -6.1307

Repurchases with fixed effects Model 2 -0.0245*** 0.3147*** 0.0928*** 24.8721***

Repurchases with fixed effects Model 3 -0.027*** 0.3234*** 0.0772*** 18.5036** -97.6764**

21.47***

22.57***

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Table 5: Switching model determined by returns The regime switching system of equations is constructed according to the sign (positive or negative) of the monthly share price return. The dependent variable is the monthly Repurchased quantity, expressed in logarithm. Explanatory variables are the monthly Lagged repurchased quantity, expressed in logarithm; the monthly share Price return during the same month and the monthly share Lagged return. Positive return 0.9586*** 0.6022*** -4.1526*** -0.445 Negative return 1.139*** 0.5968*** -1.0704 0.0214

Intercept Repurchased Quantityt-1 Returnt Returnt-1

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

Table 6: Regime switching model determined by share value The regime switching system of equations is constructed according to the share price value. The price value is considered as the exogenous factor, which divides the period into two subperiods; an undervalued price regime and an overvalued price regime. The dependent variable is the monthly Repurchased quantity, expressed in logarithm. Explanatory variables are the monthly Lagged repurchased quantity, expressed in logarithm; the monthly shares Price return during the same month and the monthly shares Lagged return. Undervalued price regime Intercept Repurchased Quantityt-1 Returnt Returnt-1 2.1*** -0.2429 -5.3894*** -0.4352 Overvalued price regime -0.0466 1.2903*** 0.157 -0.0464

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Table 7: Panel data for liquidity contractors trades

A panel data model is used to determine the monthly repurchases and the monthly sales expressed in logarithm of liquidity contractors. Explanatory variables are the monthly share Price return during the same month, the monthly Lagged net repurchases, expressed in logarithm, and the Lagged cumulated net repurchases since January 2005. A Hausman test is displayed.

Repurchases with fixed effects Intercept Return Lagged net repurchases Lagged cumulated net repurchases Hausman test
* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

Sales with fixed effects -0.9648 -0.361*** 0.0131*** 8.22**

-2.321*** 0.1695*** 0.0075*** 13.66***

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Table 8: Univariate tests on firms and liquidity contractors reactions during price shocks

F-tests are used to compare firms direct repurchases and liquidity contractors repurchases as well sales during two subperiods corresponding respectively to the five highest share price returns and the five lowest share price returns days, for each firm. Quantities of shares are expressed in logarithm. Tested hypotheses are formulated. Panel A tests equalities between the two subperiods. Panel B tests equalities of repurchased quantities between firms and liquidity contractors.

Panel A: Tests of equality between the two subperiods Listed Firms H0: Equality of repurchased quantities H0: Equality of repurchased quantities H0: Equality of sold quantities H0: Equality of net repurchased quantities H0: Equality of absolute net repurchased quantities Panel B: Tests of equality between firms and Liquidity contractors trades Five lowest daily returns Five highest daily returns H0: Equality of repurchased Quantities H0: Equality of repurchased Quantities

Five highest Five lowest daily returns daily returns 0.3506 0.6646 3.8394 -3.1748 3.3453 1.3233 4.5054 0 4.5054 4.5054

F-test value 13.8739*** 111.6688*** 137.8201*** 275.7286*** 6.4282**

Liquidity Contractors

Listed firms 1.3233

Liquidity Contractors 4.5054

F-test value 60.379***

0.3506

0.6646

2.8782*

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Table 9: Regression model on orders aggressiveness

A linear regression is used wherein the quantity of shares asked either by firms orders or liquidity contractors orders are aggressive or not. Models are constructed with intraday data divided into 30- minute slots. Explanatory variables are the total quantity of shares traded on the market expressed in logarithm, the end-to-end slot price return, expressed in logarithm, and a variable capturing the distance between the slot to the opening of the day, called distance from opening.

Listed firms Limit orders Intercept Total traded quantity Price return Distance from opening -2.2663* 0.463*** 0.2179 -0.0562** Market orders -1.1045 0.3599*** 3.89 -0.0642**

Liquidity contractors Limit orders 1.4591 0.4046*** -30.1258*** -0.1109 Market orders 3.9769*** 0.2938*** -16.6429** -0.1758***

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Figure 1 CAC 40 monthly returns and repurchases evolution on 2005-2009 period

15% Repurchased quantity CAC 40 monthly return 10% 50 60

5%

40

0%

30

-5%

20

-10%

10

-15%

Figure 2 CAC 40 and repurchases evolution on 2005-2009 period

6500 6000 5500 40 Millions of shares 5000 4500 4000 20 3500 10 3000 2500 0 30 Repurchased quantity CAC 40 50 60

Millions of shares

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Figure 3 Evolution of direct Repurchases and Liquidity contractors repurchases

60 Quantity repurchased directly by firms 50 Quantity repurchased by Liquidity contractors

40 Millions of shares

30

20

10

Figure 4 CAC 40 monthly return and the monthly Liquidity contractors net trading
20 Difference (Buy-Sell) 15 CAC 40 monthly return 10% 10 5% 5 Millions of shares 15%

0%

-5 -5%

-10 -10% -15

-20

-15%

128

Figure 5 CAC 40 evolution and Liquidity contractors cumulated position

30 20 10 0 Millions of shares -10 -20 -30 -40 -50 -60 Liquidity contractors' cumulated position CAC 40 6500 6000 5500 5000 4500 4000 3500 3000 2500 2000

129

130

Troisime Partie

lachat par la socit de ses propres actions, toute une spculation effrne qui avait produit la hausse extraordinaire et factice, dont lUniverselle tait morte, puise dor. Emile Zola LArgent, 1891

Impact and Determinants of Order Aggressiveness: Why Liquidity Traders Demand Immediacy

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Abstract

The objective of this article is to examine the behavior of liquidity contractors: specific agents acting on a pure order-driven market, Euronext Paris, who are supposed to provide liquidity. In many respects, they are similar to the liquidity traders as defined in related literature, and therefore present their empirical illustration. Price and liquidity impacts of such agents are studied in this article. I observe that liquidity contractors submit more market orders than limit orders, but reduce spread significantly and durably, providing depth when they are present in the limit order book. Findings also demonstrate that aggressiveness increases at the closing auction. This suggests an inventory problem. Furthermore, it does not seem that liquidity contractors provide more liquidity than any other market participant. Finally, determinants of orders aggressiveness are analyzed. Price return proves to be the most important of them. Liquidity contractors act as contrarians by supporting price aggressively during downward trends. Aggressiveness is neither related to the inventory problem nor to limit order book informativeness but presumably arises from an undisclosed objective consisting of supporting price.

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Euronext Paris, the French stock exchange, is an electronic order-driven market with a limit order book. Although several characteristics have changed since Biais, Hillion and Spatt (1995) paper, their findings present detailed and, to a large extent, still valid information on the French stock exchange structure and functioning. In the 1980s, Euronext Paris introduced specific agents in order to provide liquidity, especially on share markets of small-cap listed firms. These liquidity suppliers were expected to submit orders to offer more attractive conditions to other market participants27. In 2001, the French legal framework for the liquidity suppliers was outlined in a specific regulation, which is a part of a global regulation governing the share repurchase programs. These agents are known as liquidity contractors in reference to the agreement called liquidity contract signed between them and a listed firm for the purpose of providing liquidity and encourage trading. In fact, liquidity supply constitutes one of the possible objectives of the share repurchase programs. In practice, objectives are approved by the shareholders by way of resolution voted at the annual general meeting, then assigned to managers. Although other objectives such as acquisition of shares to hedge stock options plans or to reduce the capital are executed directly by managers, solely the independent broker chosen by firm can perform the liquidity supply objective. Although the European Regulation No. 2273/2003 of 22 December 2003 (the European Regulation)28 does not expressly provide for liquidity contractors, this practice remains legally allowed in France and have been institutionalized by French Autorit des

27

28

For descriptive statistics on liquidity providers on Euronext Paris, refer to Declerck and Hazart (2002). Commission Regulation (EC) No. 2273/2003 of 22 December 2003 implementing the 2003/6/EC Directive as regards exemptions for buy-back programs and stabilization of the financial instruments.

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Marchs Financiers 29 (the AMF) as accepted market practice within the terms of European Directive 2004/72/CE of 29 April 2004 (the European Directive)30. Taking into account the contribution of liquidity contractors interventions to market liquidity, the French regulatory authority exempted them from the main restrictions set on performance of the other objectives of share repurchase program. The AMF also approved a code of ethics with regard to purpose, execution, and allocations of liquidity contracts. The objective of liquidity supply is performed in the following way: a firm provides shares and cash to a broker who submits orders on firms shares. The broker acts independently and determines the orders submission strategy on a discretionary basis. Some liquidity contracts are signed with the largest firms 31 . These firms argue that liquidity contractors may reduce volatility and stabilize prices by submitting orders and providing liquidity. However, such orders are deemed to be placed by firm itself according to the share repurchase programs regulation. The subject matter of this article is studied from two different perspectives, practical and academic. As far as the practical standpoint is concerned, the paper aims at describing agents behavior and define whether they actually provide liquidity or not. This element is of great importance since the aforementioned European Directive requires, inter alia, that liquidity contractors generate a real positive impact on market liquidity in order for such practice to be acceptable and remain in line with the European legislation. Furthermore, it is highly likely that French model of the liquidity contract will be implemented on other European stock exchanges, such as Euronext Amsterdam, the Milan Stock Exchange (Borsa Italiana) and the
The French financial market regulator, former Commission des Oprations Boursires (the COB), equivalent of the U.S. SEC. 30 Commission Directive (EC) 2004/72/EC of 29 April 2004 implementing Directive 2003/6/EC as regards accepted market practices, the definition of inside information in relation to derivatives on commodities, the drawing up of lists of insiders, the notification of managers transactions and the notification of suspicious transactions. 31 In 2008, half of CAC40-listed firms signed a liquidity contract.
29

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Madrid Stock Exchange (Bolsas y Mercados Espanoles). Therefore, any findings concerning the impact of French liquidity contractors on liquidity could prove relevant for competent authorities in these countries. The academic relevancy of the article lies in the analysis of the investors who are, by definition, considered as pure non-informed investors with characteristics specified in related literature. In that particular respect, the present study leads to some interesting conclusions concerning order submission strategy and determinants of orders aggressiveness. Some articles focus on orders submission strategy (Parlour, 1998; Hollifield, Miller, Sandas and Slive, 2002; and Foucault, 1999) without taking into consideration the information asymmetry. Other articles relating to electronic markets, such as Ranaldo (2004) and Griffiths, Smith, Turnbull and White (2000) concentrate on the determinants of order aggressiveness. Harris (1998) and Bloomfield, OHara and Saar (2005) take a close look at the behavior of informed investors and liquidity traders (non-informed by definition) on an electronic market. On one hand, in theory, non-informed liquidity traders are expected to submit noninformative limit orders (Glosten, 1994; and Seppi, 1997). Consequently, they are exposed to an adverse selection risk and non-execution cost. On the other hand, informed investors are expected to submit market orders to take advantage of the private information they hold. However, some authors suggest that a more complex decision-making process is involved. For instance, Harris (1998), Bloomfield, OHara and Saar (2005), and Kaniel and Liu (2006) demonstrate that the behavior of informed investors and liquidity traders is changeable and far from static. Although recent papers mainly focus on the behavior of informed investors, they also provide insight on the behavior of liquidity traders as non-informed investors who are supposed to provide liquidity. Harris (1998) points out that liquidity traders due to their

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obligation to meet an assigned objective within an imposed deadline, start by submitting limit orders then, they switch to market orders as the deadline approaches. Bloomfield, OHara and Saar (2005) carried out an experiment in order to better understand order submission strategy and liquidity variations on an electronic order-driven market. The originality of their paper resides in comparison of the conventional theory based on the impatience of informed investors with the informed investors observable interest. They note that informed investors submit more limit orders than liquidity traders, but liquidity traders submit more aggressive orders as the end of trading period approaches. In other words, liquidity is alternatively provided both by liquidity traders (consumed by informed investors) and informed investors (consumed by liquidity traders). Based on the AMFs proprietary and confidential information on liquidity contractors orders and Euronext Paris market data, I conduct a study on a specific liquidity trader, which could empirically illustrate findings of the recent papers, at least in their part dedicated to liquidity traders. Indeed, the findings of the present study demonstrate that liquidity contractors submit more market orders than limit orders and the aggressiveness increases towards the closing of the auction 32 . Consequently, liquidity contractors seem to have a significant impact on prices, however do not seem to provide liquidity on as large a scale as it may be required by applicable regulations. More interestingly, the impacts are not identical regarding the direction of the orders. Price impact of buy orders is stronger than of sell orders. A conclusion that may be drawn from the above is that liquidity contractors do not provide more liquidity than any other investor. Determinants of aggressiveness are studied with an ordered probit model. This model reacts similarly to the one described in Ranaldo (2004) and Griffiths, Smith, Turnbull and White (2000) which allows to conclude that the price return constitutes a dominant
32

However, considering the size of trades during closing auctions, an analysis focused on this specific moment has to be carried out.

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determinant of buy order aggressiveness. In fact, liquidity contractors reveal contrarian behavior during downward trends, by submitting aggressive market buy orders, whereas sell order submission strategy is not affected by price return. The above findings have to be interpreted carefully. Liquidity contractors, by definition, were supposed to perfectly illustrate the liquidity traders behavior. However, their contrarian behavior may be more accurately compared to that of the non-informed investor or may be explained by an agency problem related to the liquidity agreement signed with listed firms. Indeed, a signal problem may arise due to the difficulty, for liquidity contractors, in having a durable impact on liquidity and, for firms, in measuring it. By acting as contrarian, liquidity contractors support price during negative trends. The impact of liquidity contractors on share price could constitute a better signal, for firms, to measure the quality of the liquidity contractors performance. The paper is structured as follows. Section 1 covers a detailed description of liquidity contracts in share repurchase programs. Information on Euronext Paris and datasets are presented in Section 2. Descriptive statistics of trades and orders timing are provided in Section 3. Section 4 discusses the execution costs and price impact, followed by the analysis of the impacts on liquidity in Section 5. Models on determinants of orders submission strategy are considered in Section 6. Section 7 concludes.

1. Liquidity Contracts in Share Repurchase Programs Before the European Regulation took effect in October of 2004, liquidity contracts had been governed exclusively by French regulations. It is worth highlighting that under French legal regime liquidity contracts constituted a lawful market practice. At present, liquidity contracts fall into scope of the European Regulation and, being in line with its provisions, continue to be legally valid in France.

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Liquidity supply is one of the objectives of share repurchase programs. Under French regulation, share repurchase programs must be authorized by the annual general meeting. Shareholders decide which objectives managers have to fulfil over a period of eighteen months from the date of the resolution approval. Besides liquidity supply, the other objectives of share repurchase programs include: hedging stock option plans, reduction of capital, payment in shares for an external acquisition and cash flow management. Managers are allowed to directly perform all objectives of the share repurchase program but the liquidity provision. The execution of this last mentioned objective has to be delegated to a broker by means of liquidity contract. A liquidity contract defines, inter alia, allocations - cash and shares -given by the firm to the broker. The contract is executed by the broker who trades on the market in order to enhance liquidity and stimulate activity on the firms share market. The broker designs and performs order submission strategy on a discretionary basis without being influenced by the firms managers and without receiving any private information from them. As the liquidity contract makes part of the share repurchase program it is subject to the same legal restrictions as the program itself. Two 10% rules have been laid down by the French Commercial Code. According to the first rule, firms are not allowed to hold, at any time, more than 10% of its shares, whilst the second rule forbids the firms to repurchase more than 10% of the shares issued at the date of the resolution approval and during the authorized period. These rules are binding to the managers who, consequently have to regularly exercise control over the liquidity contractors activity. Unlike liquidity contractors, managers have to observe an additional rule, known as the 25% rule. This rule sets forth an upper limit of a daily quantity of shares repurchased depending on the firms size. For instance, for the largest French firms, the 25% threshold is calculated taking into account the volumes traded for three days prior to the repurchasing day,

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whereas for the smallest firms the period under consideration is extended to fifteen days. It is important to point out that according to applicable regulation, French firms are not allowed to make repurchases during negative windows, defined as a period prior to the announcement of annual reports or any other announcements that may have an impact, either positive or negative, on share price33. The above restriction is not relevant to liquidity contractors, as they act independently to managers and therefore are deemed not to hold private information. In other terms, liquidity contractors are neither constrained by the calendar nor by traded volume on the market. Their sole obligation is to comply with restrictions concerning cash and shares. It is forbidden for liquidity contractors to borrow shares to short sell them or to borrow money in order to buy more shares. In addition, like any other market participant, the liquidity contractor has to operate in line with applicable regulations. In terms of transparency, upon signature of the liquidity contract, listed firms are required to disclose information concerning the allocations and identity of the broker. Furthermore, information on the amount of money and shares hold by the liquidity contractor has to be reported every six months. French firms do not disclose directly their trades. Under applicable regulation, firms have to submit to the AMF a monthly report depicting their trades on Euronext Paris. At the end of each month, the AMF collects hundreds of reports detailing information about the trades, such as date, brokers identity, orders direction (buy and sell), quantity of shares, and price or daily average price34. The quantities of shares bought and sold by each firm during the previous month are published on the AMFs website at the beginning of the following month. Those reports contain the liquidity contractors trades data, as well. As of October 2004, listed firms are bound by a new requirement in the field of disclosure. Pursuant to provisions of the European Regulation, firms must report their
33 34

COB Regulation n90-04 relative to stock price determination. The structure of data is further explained in the next subsection.

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repurchase trades every week. The informational content of this weekly disclosure is more detailed, as it includes the day of trade and average price. However, this additional requirement does not apply to liquidity contractors, thus they have no obligation to report on a weekly basis. Finally, stylized characteristics of the liquidity contractors motivation have to be considered. Financial incentive is the first on the list. Liquidity contractors are remunerated on a basis of a fixed price.35 Second, their activity has to be reported monthly to the firms. It is important to point out that they have to trade regularly, almost every day, in order to ensure a permanent activity on share market. Third, firms provide them with a limited amount of cash and shares. This is considered acceptable practice as their activity is supposed to generate positive profits, otherwise they would not be in the position to secure their activity for the term of the liquidity contract. Fourth, in order to be able to autonomously define their strategy concerning the execution of the liquidity contract they are supposed to maintain a balanced amount of cash and shares. In fact, if they only have shares, they will be only able to sell, thereby exposing the firm to a risk of losses in the event the sale is executed at a low price. It should be specified, that financial risk is secured directly by the firm, whereas the liquidity contractor only faces a risk of means reduction and termination before term of the liquidity contract. On the other hand, if they only have cash, it will only enable them to buy, more likely at a high price. It emerges from the above that liquidity contractors act as rational investors with similar characteristics to those imposed by Bloomfield, OHara and Saar (2005) on the liquidity traders in their experiment.

It should be observed, that some liquidity contractors are remunerated on a basis of a variable price. However, it results from informal consultations with managers that they are not in the position to assess the quality of the services provided by the liquidity contractors.

35

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2. Market and Dataset 2.1. Euronext Paris Market Structure

The French stock exchange, Euronext Paris, is an electronic order-driven market with a limit order book. An opening price is determined by a call auction at 9am. Next, prices are determined continuously depending on order flows from the opening call auction to 5.25pm36. A pre-closing phase starts at 5.25pm and lasts to 5.30pm where there is no transaction since the order flow fills the limit order book in order to determine the closing price by a call auction. At 5.30pm a closing price is quoted. During the continuous phase, a submitted buy (sell) limit order is executed when there is at least one sell (buy) order at the ask side (at the bid side) asking (offering) the same or a lower (higher) price. Should the opposite occur, the buy (sell) order remains in the limit order book. In principle, a non-executed order can be kept in the order book for a year or shorter depending on the investors intention. During that period, the execution procedure gives priority to the price rather than to the time of the orders arrival. In 2007, a new service called internal matching service (IMS) was introduced. The brokers that subscribed to that service benefit from the priority that is given to price and to market members identity then to the time of the orders arrival.

2.2.

Dataset

The present study of liquidity contracts is based on data covering the period between April 1, 2003 and September 30, 2004, or in total eighteen months. During the considered period, liquidity contractors exclusively operated under national applicable regulations, as the European Regulation became effective only in October 2004.

This description is available solely for stocks traded on a continuous phase. Other stocks are traded on a call auction phase, either once a day, at 3.00pm, or twice a day, at 10.30am and 4.00pm.

36

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Two types of data are used in order to examine the implementation of the liquidity contracts. Firm-level trade data including repurchase programs reports and financial market data. Both are provided by the AMF. Firm-level trade databases are elaborated from the monthly reports submitted to the AMF which contain information on firms trades such as: date, brokers identity, whether the order is buy-side or sell-side, quantity of shares and price or a daily average price (for multiple daily trades). This data is proprietary and confidential to the AMF and firms. Table 1 provides a fictitious example of a monthly report. The vast majority of firms reports only aggregated daily data, however several transfer more detailed information, including information on every single trade. Only small part of data included in repurchase programs reports is relevant for the present study of liquidity contractors trades. As for the second type of data, the regulator has Euronext Paris market data on submitted orders and recorded executed trades at its disposal. This data is uncensored and the most complete available on the French stock exchange. Table 2 demonstrates a fictitious excerpt of the market data wherein one line corresponds to one trade. In this example, buyer coded 504 refers to the market member Socit Gnrale Securities. Client code 1 indicates that the buyer is a third party. In other words, the buy order is submitted by a client of the market member 504. Client code 2 means that the market member trades on the stock exchange on its own account. I developed an algorithm that consists of merging this data in order to identify liquidity contractors trades in the market data. The following example illustrates the procedure : as can be seen, in the two first trades (rows) of Table 2, the buy order numbers, i.e. 235, are the same. Thus, the two first trades stem from the same buy order and must be aggregated as they have the same decision maker. At this point, the identity of the decision-maker is unknown. However, the aggregated quantities of shares (2,000 and 8,000) and prices (35.00 and

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36.50) exactly match the figures of the first row reported in Table 1 (the volume-weighted average price of the two trades is exactly 36.20 and limits are also 35.00 and 36.50). Additionally, the brokers identity reported by the firm corresponds to the broker who bought the shares. Therefore, it may be assumed that these two trades in the market data correspond to liquidity contractors trades since the price, the quantity and the brokers identity match perfectly. This algorithm has been applied to liquidity contractors trades reported to the AMF during the relevant period. Concerning the cases for which I do not find a perfect triplet (for which quantity, price, and brokers identity correspond exactly to the information reported by firms to the AMF), an analysis based on share quantities and on the brokers identity, contained in the reports, is conducted. The overall sample of liquidity contractors trades reported to the AMF represents 88,633 trades (69,558 orders) realized by liquidity contractors on 124 shares, amounting to 458 million (278 million in buys and 180 million in sales) during the relevant period.

3. Descriptive Statistics and Timing This section takes a close look at the liquidity contractors behavior in an intraday time horizon. Trades and orders are successively analyzed. Figure 1 shows the cumulated quantities of traded shares, both bought and sold by the liquidity contractors during the 18-month period. The quantities are split into 30-minute slots to demonstrate a typical trading day. The last sub-period, after 5.30pm, corresponds to the closing auction while the penultimate sub-period refers to the lasts 25 minutes (from 5.00pm to 5.25pm) since the last five minutes correspond to the order accumulation phase in expectation of the closing auction. As can be noticed, quantities of traded shares are relatively smaller during midday compared to morning or afternoon sessions. This is similar to a smile pattern typically

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observed on financial markets. An interesting element is the amount of shares bought during the closing auction, which is the highest point of the day (in cumulated quantity). Liquidity contractors do not seem to trade homogeneously during the day. This fact might be related to the other market participants who are more active on markets in the morning and in the afternoon (especially after opening time on the U.S. stock exchanges). The next figure confirms this observation. Figure 2 displays the average proportion of recorded trades that involve liquidity contractors during the trading day; split into 30-minute slots. The proportions are measured in two different ways. The first uses the total number of recorded trades while the second equals the number of trades weighted by the volume of traded shares. As can be observed, a volume-weighted average is constantly lower than an equallyweighted one. These two trends are moderately constant throughout the day except for the closing auction. The first trend fluctuates between 10% and 20% at the closing auction, while the second trend fluctuates around 50% until 5.25pm. During the closing auction, trades of liquidity contractors represent about 70% out of recorded trades. On average it accounts for almost 20% of traded volumes. This is presumably due to the fact that liquidity contractors operate mainly on mid- and small- caps, even if some of them operate on large caps. Thus, in terms of the number of trades they may represent a large proportion, whereas in terms of the volume they represent a small proportion due to the weight of large caps. This point also suggests that a specific analysis concerning the closing auction phase should be conducted. Figure 3 sheds light on the timing of order submissions. It displays the proportion of the orders submitted by the liquidity contractors and divided by all submitted orders, during day split into 30-minute slots. Once more, a smile pattern is observable. Liquidity contractors submit proportionally more orders in the morning and in the afternoon than over the middle of

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the day. Moreover, the first half hour of trading represents almost 11% of all submitted orders whilst the last half hour of trading accounts for almost 13%. Figure 4 illustrates the proportion of cumulated limit orders to cumulated orders (both limit and market) submitted by the liquidity contractors for each 30-minute slot. This proportion is measured in number (equally-weighted) and in volume (volume weighted). Bloomfield, OHara and Saar (2005) call this statistic the submission rate. One may notice that the proportion of limit orders submitted by liquidity contractors decreases from around two limit orders for one market order during the first half hour of the trading day to around one limit order for two market orders during the last half hour as closing approaches. The last illustration consists of a table that depicts the nature of the orders submitted by the liquidity contractors. The orders are divided according to the Biais, Hillion and Spatt (1995) methodology and semantics37. They are sorted by aggressiveness as Ranaldo (2004) explains. Large buy order is the buy order, which hits the best bid quotes with a larger quantity of shares than the available quantity. Small buy order is the buy order, which hits the best bid quote with a quantity smaller than the available quantity. Within the best quotes buy order is the buy order, which is added at the best bid quote. The two first orders are the market orders while the other two categories of orders are limit orders. These authors mention cancellation orders as the least aggressive orders. However, cancellations are not available in the collected data. Hence, this category of the orders and the orders submitted in the limit order book but not at the best quotes have been omitted in the present paper. As is demonstrated in Table 3, liquidity contractors submit proportionally more buy market orders than buy limit orders. By comparison, they submit proportionally less sell

37

Bisire and Kamionka (2000) also use this distinction.

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market orders than sell limit orders. This may suggest that they are more aggressive when they buy than when they sell. In general, they submit more market orders than limit orders. The next section elaborates the analysis of the limit and market orders.

4. Execution Costs and Price Impact 4.1. Implementation Shortfall and Realized Half-Spreads

The first matter considered in this section is the execution costs and price impact of liquidity contractors orders. Classically, price impact is measured on a basis of the effective half-spread and the realized half-spread. The effective half-spread compares the trade price to the mid-quote prevailing immediately prior to the trade. However, in this paper the effective half-spread is measured by the implementation shortfall (Perold, 1988) that is considered by Bessembinder (2003) as the best way to estimate execution costs. In fact, the implementation shortfall compares the trade price to the mid-quote prevailing at the moment at which the order arrived in the limit order book. In other words, execution costs are measured taking into consideration the instant at which decision to trade is taken. The implementation shortfall is measured as follows:
, , , ,

where Di,t is a dummy variable which equals 1 when the order i is a buy order and -1 when it is sell order. Pi,t is the price of execution of order i at time t and quote prevailing at the instant prior to the arrival of order i. As far as market orders are concerned, the classical effective half-spread and the implementation shortfall render identical results. On the contrary, limit orders may not be related to the prior mid-quote before they are executed by a market order if they arrived an hour before their execution, for instance. In such cases, the classical effective half-spread will
,

, the mid-

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only take into account the execution costs incurred by the anonymous market order. Thus, the implementation shortfall is more advantageous as it allows an estimation of the execution costs of all orders submitted by liquidity contractors and not only of market orders. Execution cost is obviously expected to be positive for market orders but negative for limit orders. The realized half-spread compares trade price to mid-quote following the trade. A time decay of 5 or 30 minutes is usually chosen (as in Bessembinder, 2003; and Odders-White, 2000, among others). The longer the time elapsed, the more the impact on prices is considered as permanent. The effective half-spread describes how much an investor accepts to pay by crossing the mid-quote to hit the best quote at the opposite side. By comparison, the realized half-spread describes how the acceptance to cross the mid-quote is interpreted by other market participants considering the private information that the trade conveys (Glosten, 1987). Regarding the implementation shortfall, the same distinction is made between market and limit orders, as the realized half-spread is only relevant for market orders. Two different methods are used to measure the realized half-spread. The first method is considered as an immediate impact, while the second as a permanent impact. Harris and Hasbrouck (1996) measure the realized half-spread with the mid-quote prevailing immediately following the trade:
, , , ,

where

is the mid-quote prevailing at the instant following the order execution i.

The second method estimates the permanent price evolution with a mid-quote prevailing 30 minutes after the trade.
, , , ,

where

is the mid-quote prevailing 30 minutes after the execution of the order i.

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Finally, the price impact measurement for market orders is the difference between the implementation shortfall and realized half-spread:
, , , ,

= implementation shortfalli,t Realized half-spreadi,t

Table 4 presents results. Panel A describes the implementation shortfall for all liquidity contractors orders. As can be seen, generally the execution costs are negative by 5 cents on average (or -0.10% of midquote). Panel A also distinguishes the implementation shortfall for the market and limit orders. As expected, market orders present positive execution costs while limit orders execution costs are negative. Although the proportion of market orders is larger than the proportion of limit orders, the negative execution costs of limit orders weight heavily on the total execution costs. It is interesting to note, that sell market orders are affected by a higher cost than buy market orders. As for the limit orders, the negative cost is smaller for buy orders than for sell orders. These findings suggest, that liquidity contractors submit buy and sell orders at a different distance from the prevailing mid-quote. Limit buy orders may be submitted closer to the best quotes than limit sell orders. Panel B presents results for immediate realized half-spread. Market orders improve prices by 0.007 euro (or 0.015% of mid-quote). Buy orders have a significantly stronger immediate effect (0.01 euro) than sell orders. Panel C of Table 4 contains results for permanent effect. The permanent realized half-spread of buy market orders is almost similar in value to the immediate realized half-spread. Panel D presents the price impact as the difference between implementation shortfall and realized half-spread. Immediate and permanent price impacts are measured. Buy market orders immediate and permanent price impacts are almost similar (4 cents). It means that there is no time-lag in interpretation by other market participants on what the trade provides

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as information. The immediate price impact of sell market orders amounts to about 5 cents whereas permanent price impact is higher. This suggests that market participants interpret late the fact the liquidity contractors sell as negative information.

4.2.

Execution Cost Discount

The execution cost and price impact measurements presented above are typically used in relevant literature according to which market orders, by opposition to limit orders, provide information. Limit orders are said to have neither positive impact on price nor positive execution costs. Nevertheless, they may have an impact on price, which could be defined as their ability to absorb the aggressiveness of market orders. In respect of the market, this impact is called resiliency. The resiliency may be expressed by stability of the price irrespective of the amount of traded quantity. Likewise the price impact of market orders is measured with regard to the price change, price impact of limit orders could be measured with regard to the price stability. In the present subsection, a measurement answering the question to what extent the price would have been affected if the liquidity contractor had not been in the limit order book is used specifically for limit orders. This measurement consists in estimating the difference between the real observed price and the price that would be fixed if the liquidity contractors limit orders were not in the limit order book when anonymous market orders hit them. In other words, this method measures the execution cost discount, literally the execution costs saved by the investors who submitted market orders thanks to the presence of liquidity contractors on the opposite side of the limit order book. According to their mission, liquidity contractors main objective is to provide favourable trading conditions to other market participants. The execution cost

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discount may constitute an accurate measurement allowing to assess the contribution of liquidity contractors to reduce transaction costs. Nonetheless, the abovementioned execution cost discount indicator contains one weakness. It may be assumed, that the market order is submitted because the expected execution cost, among other reasons, is in advance accepted by an impatient investor. Not only would the same investor not demand for the same quantity of shares had the liquidity contractor been absent of the limit order book, but also no trade would have been executed. Thus, the price calculated without the liquidity contractors order is purely hypothetical. For instance, one sell order has been removed from this measurement because the liquidity contractor was alone at the buy side. Thus, an impatient investor undeniably submitted his market sell order because of the presence of the liquidity contractor (this is strengthened by the fact that the sell order asked exactly the same quantity of shares as the liquidity contractors buy order). No trade would have occurred if the liquidity contractor had not been in the limit order book. The following methodology is used to determine the hypothetical price. In the first place, a direction of an anonymous market order is identified. Next, I determine on which quote was the liquidity contractors order on the opposite side. Afterwards, the quantity of shares traded with the liquidity contractor is withdrawn and I calculate the average price of all trades executed at the same instant stemming from this market orders arrival in accordance with the shape of the limit order book without the liquidity contractor orders. Finally, the execution cost discount is calculated as:
, , , ,

150

where

is the estimated hypothetical price if the limit order i submitted by the

,

liquidity contractor was not in the limit order book and realized at the instant of the market orders arrival.

, is the average price of trades

Panel E of Table 4 presents the execution cost discount considered as the price impact absorbed by liquidity contractors limit orders. Like in the previous example, some orders have been removed since the liquidity contractor was alone at the buy (sell) side when the market order arrived. Generally, about 3 cents are saved by aggressive investors thanks to the liquidity contractors limit orders. For buy limit orders (the anonymous market order is a sell order), the execution cost discount is 0.032 euro, while for sell limit orders (the anonymous market order is a buy order) is only 0.018 euro. More interestingly, the discount is larger for anonymous sell orders. This may suggest that, being largely present at the buy side liquidity contractors orders passively support prices by absorbing the aggressiveness of sell orders. It is also consistent with the results of Panel A that shows that limit buy orders are nearer to the best quotes than sell orders.

4.3.

Effects on Price Volatility

Reduction of price fluctuations is the second objective of the liquidity contractors. This explains the reason why some liquidity contractors are active on shares belonging to the CAC 40 index. The impact on price volatility of liquidity contractors is assessed in this subsection. In this regression model the actual intraday volatility is explained by a daily activity of liquidity contractors (the amount of daily repurchases and sales is the explanatory variable) with control variables. Table 5 presents results of the regression. Although, in theory, the causality is not well defined, the control variables such as market capitalization, time-weighted relative bid-ask

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spread, daily average mid-quote and daily turnover (Chordia, Roll and Subrahmanyam, 2001) are used to explain a real intraday volatility. The volatility is supposed to be negatively correlated to market capitalization. On the other hand, the coefficients of the time-weighted relative bid-ask spread and turnover are expected to be positive (Roll, 1984). As can be seen, the control variables react as expected. The larger daily turnover, the higher the volatility. Volatility is also positively correlated to relative spread as the average daily mid-quote. On the other hand, the volatility is negatively related to market capitalization. The relationship is by far insignificant, regardless of the fact that the daily activity of liquidity contractors is negatively correlated to real intraday volatility. In fact, contrary to the liquidity contractors standpoint, it would seem that they have no impact on market volatility.

5. Liquidity Impact The other matter studied in the paper concerns the question of whether liquidity contractors provide liquidity to market or not. The main objective of liquidity contractors justifying their existence is that they supposedly have positive effects on market liquidity. Determining the impact of a particular investor on liquidity proves to be a potentially difficult task. Nevertheless, a particular quality of the data enables to envisage several potential solutions. Firstly, liquidity proxies, such as spread and depth, are calculated immediately before and after the arrival of orders, as two snapshots of the limit order book. Comparison of both of them may provide an accurate estimation of the real immediate effect of liquidity contractors orders on liquidity.

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Secondly, liquidity proxies are calculated, first time when the liquidity contractor is present in the limit order book and a second time when he is not. Comparison of both periods demonstrates the contribution of liquidity contractors limit orders to market liquidity. Thirdly, a statistical solution that consists in building of the distribution of spread variations after the arrival of a new order is proposed. One subgroup is built from the liquidity contractors orders; the other one is from the other market participants orders. Comparing both allows one to ascertain whether liquidity contractors provide more liquidity than other market participants or not. Panel A of Table 6 presents findings of the first method. Only liquidity contractors orders arriving at the best quotes or offering a better price (this includes market orders as well) have been selected. Average spreads and depths displayed immediately prior to the order arrival in the book and immediately following its arrival are compared. As can be seen, the orders of liquidity contractors deteriorate spread. In other words, the liquidity demanded by liquidity contractors market orders is not compensated by the liquidity provided by limit orders. Interestingly, the immediate impact of buy orders on liquidity is not significantly different to that of sell orders. However, buy orders imply increase of depth while sell orders imply its reduction. Panel B of Table 6 presents results of two situations wherein once liquidity contractors are present in the book and a second time they are not with respect to orders direction. This method is obviously only used for liquidity contractors limit orders arrived at or within the best quotes and does not take into consideration the market orders. Spreads and depths observed during the day are time-weighted to take into account the duration of presence and the amount of time that passes before the quote is updated. As a result, it can be observed that spread narrows more significantly when liquidity contractors are in the limit order book than when they are not. Meanwhile a lower amount of shares are offered at best quotes. Putting

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aside market orders, this suggests that liquidity contractors have a durable positive effect on market liquidity when they submit limit orders. The third method is implemented as follows. Due to the difficulty in handling a significant amount of data, fifty days have been randomly picked up from the 18-month period. Then, for the days and shares on which liquidity contractors were active, all orders arrived during these days at or within the best quotes (including market orders) have been selected. Afterwards, distribution of spread variation due to new orders arrival is developed according to the shape of the limit order book immediately prior and following the orders arrival. Finally, a subgroup of spread variation due to anonymous orders is distinguished from another subgroup of spread variation due to the liquidity contractors orders. In fact, these distributions are conditional on the shape of the limit order book displayed before the order arrival. Certain authors, such as Parlour (1998), shed light on the fact that the probability of submitting a limit order within the best quotes, thus reducing the spread (spread variation is negative), is higher when the spread is wider. Hence, the spread variation arising from an orders arrival is related to the shape of the limit order book prevailing at the moment the order arrived. In other words, depending on the wideness of the spread, a new order would reduce more or less the spread. These two subsample distributions are not shaped normally. Furthermore, the nonparametric Kolmogorov-Smirnov test reveals that these two distributions are not equal (D = 0,175; p-value < 0.0001). Thus, the nonparametric Mann-Whitney-Wilcoxon test is used to compare impact of liquidity contractors and other market participants on spread. Table 7 contains results of parametric and nonparametric tests. The t-test demonstrates a significant disparity in the impact on liquidity of both investors. Therefore, the Mann-Whitney-Wilcoxon score for liquidity contractors is larger than one of other market participants. These findings

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suggest that, in general, the liquidity contractors do not provide more liquidity than any other market participants. In summary, here is an agent who is supposed, by definition, to provide liquidity. However, one can observe that not only does the liquidity contractor submits limit orders but also market orders. As a consequence, he demands liquidity rather than provides it. Liquidity contractors may not consider their mission as aiming to provide more favourable trading conditions by seeking to reduce spread or increase depth. They presumably believe that their objective merely consists in providing trading activity on the markets. In fact, liquidity contractor behaves as a typical anonymous and diligent liquidity trader (potentially similar characteristics described in Bloomfield, OHara and Saar, 2005) on the market. The above considerations raise an important issue, especially vis--vis regulatory authorities, concerning the real advantages that liquidity contractors provide on the market. In this specific respect, the academic matter that needs to be addressed entails finding out what determines the switch from limit to market orders. The next section focuses on this.

6. Determinants of Order Aggressiveness and Order Submission Strategy The previous sections revealed that liquidity contractors submit market orders and do not provide more liquidity than any other market participants. Yet, from an academic viewpoint in terms of characteristics, liquidity contractors can be considered as pure noninformed investors. In the present section, the order submission strategy is documented. An ordered probit model as in Ranaldo (2004) is developed to identify determinants of order aggressiveness. This model identifies to what extent the aggressiveness of liquidity contractors orders is determined by market conditions.

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6.1.

Determinants of Orders Aggressiveness

Like Ranaldo (2004), I use an ordered probit model to identify determinants of aggressiveness of liquidity contractors orders. With regard to aggressiveness, liquidity contractors have four choices of possible orders: large market order (choice #1), small market order (choice #2), limit order within the best quotes (choice #3) and limit order at the quotes (choice #4). Other orders are possible as well. For instance, orders in the book far from the best quotes. However, this category of orders is not interesting from the perspective of this section since they do not operate on the displayed and available liquidity38. Taking into account the shape of the limit order book at the immediate instant prior to the order submission, liquidity contractors are supposed to determine the aggressiveness of their orders. Thus, the explanatory variables are Quoted spread, which is the difference between bid and ask quotes, Depth on buy and sell sides, which is the number of shares at the best quotes and Order wait processing time defined as the time elapsed between the last three consecutive orders arrived in the book. Three following variables are added to the original model: the inventory dummy variable, which is assigned a value of 1 if the liquidity contractor has already submitted an order in the opposite direction during the trading day; the time variable measured in logarithm of minutes from the opening time and the return variable, which measures the price return of the shares from the opening39 to the decision to submit the order. According to the academic literature referred to in Ranaldo (2004), aggressiveness of a buy order is expected to be positively correlated to the depth on buy side , whereas depth on the opposite side is expected to have a negative correlation. Parlour (1998) finds that, the
This point may be questioned, if one assumes that liquidity contractors do not submit orders at the best quotes but rather in the book to fill the queue, for instance. However, Pascual and Veredas (2003) demonstrate that the best quotes concentrate the main information of the limit order book, and therefore would influence the order submission strategy. 39 In Ranaldo (2004), transient volatility is used separately as explanatory variable since results obtained are contrasted when the variable is included in the multivariate regression. In this model, transient volatility has not proved to be a significantly decisive factor. It seems also to be correlated to price return.
38

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probability of submitting a new limit buy order depends on the crowded-out effect where a rational investor (buyer) would submit a market order to break the queue of the limit orders on his side. However, if the queue on the opposite side is crowded, buyers would be inclined to submit limit orders in order to be hit by a sell market order. Orders aggressiveness is expected to be negatively related to the spread. Foucault (1999) shows that, the flow of limit orders is positively related to the size of the spread. The wider the spread, the more investors submit limit orders. The order flow processing time is expected to be positively related to order aggressiveness (Beber and Caglio, 2005). Easley and OHara (1992) demonstrate that absence of trades may be interpreted as lack of information that would imply absence of the information asymmetry and adverse selection. Liquidity investors may be inclined to submit limit orders. Therefore, propensity to submit market orders should be positively related to the frequency of orders flow. The time elapsed from the opening is expected to be positively related to aggressive orders. Harris (1998) argues that liquidity traders who face a deadline start by submitting limit orders, and then end by submitting market orders. The same outcome emerges from Bloomfield, OHara and Saar (2005). Figure 4 also suggests this relationship. The fact that a liquidity contractor has already submitted (at least) an order on the opposite side during the day is supposed to be correlated to order aggressiveness. This could be interpreted as inventory problem highlighted in OHara and Oldfield (1986). A risk exposure faced by a liquidity contractor who holds durably an open position (long or short) on the share may lead him to submit a market order to balance his position before the end of the day. Concerning the last variable - the price return since the opening there presumably is no correlation with the order aggressiveness. Liquidity contractors are not expected to face a

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strong market trend by submitting orders in the opposite direction. They would face the adverse selection. Thus, if the trend is considered too strong, the liquidity contractor may interrupt his operations. In practice, allocations put at the liquidity contractors disposal constitute a key factor. The fewer means at their disposal, the more sensitive to price return they should be. Two different ordered probit models, one model for each orders direction, are built up as follows40: Consider a latent continuous variable,
, , ,

, formulated as
,

determines an observable discrete variable, thresholds : 1, 2, 3, 4,

, in respect of the following unknown

if y , if y, y, if if

The ordered probit model is built from a normal distribution but is not linear, hence estimated coefficients are not relevant in order to interpret a relation between explanatory variables and endogenous variable (except the sign of the estimated coefficient). For this reason, marginal effects are calculated as follows:
, ,

1 2

40

More references in Greene (2003).

158

3 4

where

. is the normal density distribution. The measurement of the marginal effect

is slightly different for a dummy explanatory variable. Indeed, since the only possible values are 0 and 1, the marginal effect is measured as the difference between the model responses when the dummy variable equals 0 and when it equals 1:
, , ,

, ,

, ,

, ,

, ,

Table 8 presents estimated coefficients. As can be observed, the results are consistent with Ranaldo (2004). The liquidity contractors choices correspond perfectly to expectations. According to the sign of the coefficients, a higher depth at the same side determines the aggressiveness of liquidity contractors orders. Conversely, a higher depth at the opposite side makes the liquidity contractors more patient. As predicted, the aggressiveness of orders diminishes when the spread is wider. The time elapsed between orders arrival constitutes also a determining factor of order aggressiveness. Additionally, as the closing approaches, orders become more aggressive. This finding is consistent with the findings presented in the literature. Surprisingly, the fact that liquidity contractors have already submitted an order in the opposite direction during the trading day does not induce more aggressiveness. Finally, the relationship between order aggressiveness

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and price return is not significant for sell orders while it is positively significant for buy orders.

6.2.

Aggressive Buy Orders to Support Price

The most interesting finding of the ordered probit model is the influence of price return on the aggressiveness of buy orders submitted by liquidity contractors. Price increase reduces the aggressiveness of liquidity contractors, whereas price decrease strengthens the aggressiveness of buy orders. However, this relation is only observed for buy orders but not for sell orders. Table 9 presents corresponding marginal effects for buy and sell. Asymptotic variance of marginal effects is obtained by the delta method. The content of the aforesaid Table allows to assess and to interpret ordered probit model results. As demonstrated, price return is determining for the decision to submit large buy market orders. In fact, a price drop of 1% leads liquidity contractors to submit large buy orders with a probability higher of 34.5%. However, price return does not affect small buy market orders. The preference to submit large buy orders than small buy orders, when price falls, indicates that liquidity contractors try to support actively the price. Parlour (1998) and Hollifield, Miller, Sandas and Slive (2002) demonstrate that the probability to submit a market buy order is higher following a submitted market buy order. Biais, Hillion and Spatt (1995) confirmed this assumption by observing the order flow on the Paris Bourse. It can be presumed that liquidity contractors are aware of the fact that their orders will affect a future order placement strategy. That means that liquidity contractors support price by trading aggressively and expecting that other buyers would follow them by acting aggressively to limit the price drop.

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Price return also affects the probability to submit a limit order within the best quotes in high proportion (25% if the price increases by 1%) but its statistical significance is less important. Finally, limit orders at the best bid are also strongly determined by price return. A price increase of 1% leads to an increase in probability of 11% to submit such order. In the context of rising price period, liquidity contractors fill the bid quote by offering more quantities of shares. Following Parlours demonstration, this strategy would also conduct to a passive price support by providing more available quantities on the bid quote. Consequently, the probability that the next seller submit a market order to hit the bid price decreases whereby strengthening the price trend. These results shed light on the relevancy of price return in the order submission strategy designed by liquidity contractors. However, this strategy is not symmetrical since sell orders submission is not determined by this factor. This contrarian behavior may be representative to non-informed investors but also may be explained by the agency problem arising from the agreement with listed firms. Indeed, a signal problem occurs due to the difficulty for liquidity contractors in having a durable impact on liquidity or volatility and for firms in measuring it. Thus, supporting price might constitute, for firms, a better signal to measure the quality of the performance of liquidity contractors market activity.

7. Conclusion The behavior of liquidity contractors as specific agent on a pure order-driven market of Euronext Paris is considered in this article. Firstly, I describe and define the liquidity contractors behavior that with regard to its characteristics is given equivalent status to liquidity traders in the relevant literature. Indeed, in many respects, liquidity contractors are similar to liquidity traders, as described in recent papers. Secondly, I ascertain the origin of order aggressiveness.

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Findings show that liquidity contractors submit more market orders than limit orders and that the aggressiveness of the orders increases as the closing auction approaches. Consequently, price impact is non-negligible, especially for buy orders. Overall, the liquidity contractors do not provide more liquidity than any other market participants. Among determinants of aggressiveness explaining the lack of liquidity provision, the price return proves to be one of the most important. Liquidity contractors act as contrarians and support price aggressively during downward trends. Finally, this article illustrates the impact of the presence of a liquidity provider that is supposed to supply liquidity on a pure order-driven market. Foucault, Kadan and Kandel (2005) recommend such liquidity providers in specific cases. However, the presence of a liquidity contractor triggers agency problems. The reason why liquidity contractors support price may not be directly related to the liquidity provision but to the nature of the liquidity agreements with firms. These findings might prove to be of particular importance for competent authorities in other countries for considering how to reduce the agency problems and determine coherent incentives for liquidity contractor.

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References Bessembinder H., 2003, Issues in assessing trade execution costs, Journal of Financial Markets, 6, 233-257. Beber A. and C. Caglio, 2005, Order submission strategies and information : empirical evidence from the NYSE, Working paper. Biais B., P. Hillion. and C. Spatt, 1995, An empirical analysis of the limit order book and the order flow in the Paris bourse, Journal of Finance, 50, 1655-1689. Bisire B. and T. Kamionka, 2000, Timing of orders, orders aggressiveness and the order book at the Paris Bourse, Annales dEconomie et de Statistiques, 60, 43-72. Bloomfield R., M. OHara and G. Saar, 2005, The make or take decision in an electronic market : evidence on the evolution of liquidity, Journal of Financial Economics, 75, 165-199. Chordia T., R. Roll and A. Subrahmanyam, 2001, Market liquidity and trading activity, Journal of Finance, 56, 501-530. Declerck F. and P. Hazart, 2002, Impacts de lanimation sur la qualit du Second March, Banque et Marchs, 60, 5-18. Easley D. and M. OHara, 1992, Time and the process of security price adjustment, Journal of Finance, 47, 577-605. Foucault T., 1999, Order flow composition and trading costs in a dynamic limit order market, Journal of Financial Markets, 2, 99-134. Foucault T., O. Kadan and E. Kandel, 2005, Limit order book as a market for liquidity, Review of Financial Studies, 18, 1171-1217. Glosten L., 1987, Components of the bid-ask spread and the statistical properties of transaction prices, Journal of Finance, 42, 1293-1307.

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Glosten L., 1994, Is the electronic open limit order book inevitable?, Journal of Finance, 44, 127-1161. Greene W., 2003, Econometric Analysis, 5th ed., Prentice-Hall. Griffiths M., B. Smith, A. Turnbull and R. White, 2000, The costs and determinants of order aggressiveness, Journal of Financial Economics, 56, 65-88. Harris L., 1998, Optimal dynamic order submission strategies in some stylized trading problems, Working paper. Harris L. and J. Hasbrouck, 1996, Market vs. limit orders: the SuperDot evidence on order submission strategy, Journal of Financial and Quantitative Analysis, 31, 213-231. Hollifield B., R. Miller, P. Sandas and J. Slive, 2002, Liquidity supply and demand in limit order markets, Working paper. Kaniel R. and H. Liu, 2006, So what orders do informed traders use?, Journal of Business, 79, 1867-1913. OHara M. and G. Oldfield, 1986, The Microeconomics of Market Making, Journal of Financial and Quantitative Analysis, 21, 361-376. Odders-White E., 2000, On the occurrence and consequences of inaccurate trade classification, Journal of Financial Markets, 3, 259-286. Parlour C., 1998, Price dynamics in limit order markets, Review of Financial Studies, 11, 789-816. Pascual R. and D. Veredas, 2003, What pieces of limit order book information are informative ? An empirical analysis of a pure order-driven market, Working paper. Perold A., 1988, The implementation shortfall: Paper versus reality, Journal of Portfolio Management, 4-9. Ranaldo A., 2004, Order aggressiveness in limit order book markets, Journal of Financial Markets, 7, 53-74.

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Seppi D., 1997, Liquidity provision with limit orders and a strategic specialist, Review of Financial Studies, 10, 103-150.

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Figure 1 : Cumulated quantity of shares repurchased and sold in intraday

The figure below shows the cumulated quantity of shares repurchased and sold by liquidity contractors on the considered period. The traded quantities are consolidated according to the timing in the trading day. The trading day is divided into 30-minute slots from 9.00am to 5.30pm.
1200000 1000000 800000 600000 400000 200000 0 -200000 -400000 -600000 -800000 Buy Sell

Figure 2: Proportion of trades involving liquidity contractors in intraday

This figure demonstrates a proportion of the trades that liquidity contractors involve in either on a buy direction or on a sell direction to all recorded trades. Proportion_EW is the equallyweighted proportion of trades. Proportion_VW is the volume-weighted proportion. The proportions are calculated according to the timing in the trading day. The trading day is divided into 30-minute slots from 9.00am to 5.30pm.
0,800 0,700 0,600 0,500 0,400 0,300 0,200 0,100 0,000 Proportion_EW Proportion_VW

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Figure 3 : Proportion of submited orders in intraday

The figure 3 shows the proportion of the cumulated number of orders submitted by liquidity contractors to all submitted orders. Proportions are calculated according to the timing in the trading day. The trading day is divided into 30-minute slots from 9.00am to 5.30pm.

0,14 0,12 0,10 0,08 0,06 0,04 0,02 0,00 Proportion

Figure 4: Submission rate of limit orders The figure below displays the submission rate which is defined as the proportion of limit orders to cumulated orders (limit and market orders) submitted by liquidity contractors for each 30-minute slots. Proportion_EW is the equally-weighted submission rate. Proportion_VW is the volume-weighted proportion. The proportions are calculated according to the timing in the trading day. The trading day is divided into 30-minute slots from 9.00am to 5.30pm.
0,700 0,650 0,600 0,550 0,500 0,450 0,400 0,350 0,300 Proportion_EW Proportion_VW

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Table 1: Excerpts from a monthly report of the share repurchase program Table 1 presents an example of transactions reported to the AMF in the monthly reports. Date is the trading date. Broker refers to an intermediary (Euronext market member) selected by a firm to execute its orders. Side is the orders side, buy or sell (which can also be transfer, if the firm transfers shares to a manager, for instance, when he executes his stock options). Quantity refers to a quantity of shares. Price is the raw price paid for the shares, excluding commissions. Firms can report the price for each transaction (as in the second row herein below) or a daily volume-weighted average price with the minimum and maximum prices executed (as in the first row herein below).
Date 01/04/2004 02/04/2004 Broker Socit Gnrale Securities Crdit Agricole Cheuvreux Liquidity Contract Yes No Side Buy Sell Quantity 10 000 25 000 Price 36.20 (min : 35.00/ max : 36.50) 35.65

Table 2: Excerpts of transactions recorded in the Paris stock exchange

Table 2 presents an example of the structure of Euronext Paris (the Paris stock exchange) market data. ISIN code is the international ISO code to identify shares. Buyer (Seller) code is the internal code granted to identify each market member. Client code refers to a nature of the order initiator (1 for a third party, 2 for its own account). Each individual order entered into the limit order book has a unique number (observable in the column Number of buy (sell) order). This number is reinitialized at the end of each day. Quantity is the quantity of the traded shares and Price refers to the transactions prices in euro.
Date 01/04/2004 01/04/2004 01/04/2004 Buyer Number Number Seller Client Client (Euronext of buy of sell (Euronext Quantity Price code code code) order order code) FR0000133308 504 1 235 24 2 515 2 000 35.00 FR0000133308 504 1 235 267 1 559 8 000 36.50 FR0000133308 504 2 259 89 1 559 25 37.80 Market (ISIN code)

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Table 3: Proportion of the orders submitted sorted by aggressiveness

Orders are sorted both by aggressiveness and direction (buy and sell). Large order is the buy (sell) order which hits the best bid (ask) quotes with a larger quantity of shares than the available quantity (choice #1).Small buy order is the buy (sell) order which hits the best bid (ask) quote with a quantity smaller than the available quantity (choice #2). Within the best quotes order is the order placed between the best ask and bid quotes (choice #3). At the best quote buy (sell) order is the buy (sell) order, which is added the best bid (ask) quote (choice #4).
Buy 0.331 0.246 0.361 0.063 Sell 0.380 0.109 0.377 0.134 Overall 0.35 0.192 0.367 0.091

Large order Small order Within the best quotes At the best quote

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Table 4: Execution costs, price impact and execution costs discount

Execution costs are measured differently for market and limit orders. Panel A shows the implementation shortfall of all orders. IS is the difference between the trade price and the mid-quote prevailing when a liquidity contractor submitted his order. Panel B presents the immediate realized half-spread for market orders. RE1 is measured as the difference between the trade price and the mid-quote prevailing immediately after the trade. Panel C is permanent realized half-spread for market orders. RE2 is the difference between the trade price and the mid-quote prevailing 30 minutes after the trade. Panel D shows price impact of market orders. PI1 is the immediate price impact defined as the difference between the mid-quote prevailing immediately before the trade and the mid-quote prevailing immediately after the trade. PI2 is the permanent price impact defined as the difference between the mid-quote prevailing immediately before the trade and the mid-quote prevailing 30 minutes after the trade. Panel E is the execution cost discount for limit orders. T-tests determine the significance of the differences.
Market orders Limit orders Overall Buy Sell Buy Sell Panel A : Implementation Shortfall for all orders IS () 0.044*** 0.054*** -0.129*** -0.212*** -0.048*** Difference -0.01*** 0.0826*** buy-sell () IS (%) 0.075*** 0.137*** -0.283*** -0.452*** -0.106*** Panel B : Immediate Realized Half-Spread for market orders RE () Difference buy-sell ()
1

0.012***

0.0008

0.007***

0.012***

1 0.014*** 0.017*** 0.015*** RE (%) Panel C : Permanent Realized Half-Spread for market orders

RE () Difference buy-sell ()

0.014***

0.024***

0.017***

-0.01*** 0.037*** 0.042***

2 0.028*** 0.054*** RE (%) Panel D : Price Impact of market orders

PI () Difference buy-sell ()

0.035***

0.055***

-0.02*** 0.045***

2 0.042*** 0.05*** PI () Difference -0.008*** buy-sell () Panel E : Execution Cost Discount for limit orders ECD () 0.032*** 0.011*** Difference 0.021*** buy-sell ()

0.029***

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Table 5: Regression on daily volatility Table 5 explains the actual intraday volatility with daily activity of liquidity contractors (the amount of daily repurchases and sales is the explanatory variable) and control variables. Control variables are: market capitalization, daily time-weighted relative bid-ask spread, daily average mid-quote and daily turnover.

Volatility Intercept Market capitalization Daily turnover Daily relative spread Daily average mid-quote Liquidity contractors activity
*** Significant at the 0.01 level.

0.0672*** -0.0155*** 0.0186*** 0.0343*** 0.0066*** -0.0001

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Table 6: Liquidity impact of liquidity contractor orders Table 6 shows liquidity impact of liquidity contractor orders. Panel A describes the immediate liquidity impact on the spread variation between instants prior to and after the liquidity contractor orders arrival. Panel B presents the difference of time weighted spread when the liquidity contractors limit orders are in the limit order book and when they are not. T-tests determine the significance of the differences.
Buy orders Panel A : Immediate Liquidity Impact quoted spread () Difference buy-sell () relative spread (%) Difference buy-sell (%) quoted depth () 0.009*** 0.033*** 254.84* Sell orders 0.012*** 0.077*** -215.12*** Overall 0.017*** 0.051*** 64.39

-0.003 -0.044***

Difference buy-sell () 469.97*** Panel B : Liquidity when the liquidity contractor is in the book and not quoted spread () -0.154*** -0.11*** -0.134*** relative spread (%) -0.539*** -0.268*** -0.416*** quoted depth () -1,360.6*** -970.48*** -1,183.1***
* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

Table 7: Distribution of Spread Variations Spread immediate variation between prior to and following orders arrival is compared, provided that the orders are submitted at the best quotes or at a better price. Subgroups are constructed as follows. First, orders submitted by liquidity contractors. Second, orders submitted by other market participants. A t-test is used to compare the results. A nonparametric test is also used to compare the results. The average score is provided.
Student t- test Means Difference (LC-Other) -0.014*** Mann-Whitney-Wilcoxon test Average Scores 68,489.98 62,421.07 z-Statistics (p-values) 12.43 (<0.0001)

Liquidity Contractors Other market participants

0.006 -0.008***

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Table 8: Coefficients of Ordered Probit Model The ordered probit model estimated coefficients are presented in Table 8. Dependant variable is the order aggressiveness sorted from the most aggressive order (choice #1) to the least aggressive (choice #4). Positive coefficient means that aggressiveness is negatively related to the explanatory variable. Regressors are a depth on the same side of the arrival order, a depth on the opposite side, a quoted spread and finally an order wait which is measured as the time elapsed between the last three arrived orders. Compared to Ranaldos (2004) model, a dummy variable indicates whether an order already submitted in the opposite direction has been added. Time is a logarithm of the time in seconds from the opening auction time. Price return is the return of share price expressed as a percentage from the opening. Finally, the three thresholds are presented as well. T-tests are used to determine the significance of coefficients.
Buy Depth on the same side Depth on the opposite side Quoted spread Order wait Dummy_opposite order Time Price return 1 2 3
** Significant at the 0.05 level. *** Significant at the 0.01 level.

Sell -0.1208*** 0.3606*** 0.3285*** -0.0043*** 0.2045*** -0.0561*** 0.0976 -0.5758*** -0.3026*** 0.8663***

Overall -0.0434*** 0.1511*** 0.3042*** -0.0034*** 0.1805*** -0.0531*** 0.5812** -0.6603*** -0.2018*** 1.062***

-0.0345*** 0.1183*** 0.2792*** -0.0031*** 0.1333*** -0.0499*** 0.9405*** -0.7206*** -0.1381*** 1.2313***

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Table 9: Marginal Effects

The below table presents assessed marginal effects corresponding to the ordered probit models coefficients. The order directions are distinguished for four choices of orders. Large order is the most aggressive order (choice #1), then small order (choice #2), order within the best quotes (choice #3) and order at the best quote (choice #4). Explanatory variables are the depth on the same side, the depth on the opposite side, the quoted spread, the order wait, a dummy variable for already submitted order in the opposite direction, the time from the opening and the price return. Asymptotic variances are measured with the delta method. A Wald test is used to determine the significance of marginal effects.
BUY Large orders Depth on the same side Depth on the opposite side Quoted spread Order wait Dummy_opposite order Time Price return 0.0128*** -0.0434*** -0.1023*** 0.0011*** -0,0487*** 0.0183*** -0.3446** Small orders 0.0009*** -0.0032*** -0.0075*** 0.0001*** -0,0037** 0.0013*** -0.0252 Within orders -0.0095*** 0.0321*** 0.0757*** -0.0008*** 0,0361*** -0.0135*** 0.2551* At orders -0.0043*** 0.0144*** 0.0341*** -0.0004*** 0,0164*** -0.0061*** 0.1147*** Large orders 0.0459*** -0.1371*** -0.1249*** 0.0017*** -0.0784*** 0.0213*** -0.0371 SELL Small orders 0.0022*** -0.0067*** -0.0061*** 0.0001*** -0.0031*** 0.001*** -0.0018 Within orders -0.0228*** 0.0679*** 0.0619*** -0.0008*** 0.0400*** -0.0106*** 0.0184 At orders -0.0254*** 0.0759*** 0.0691*** -0.0009*** 0.0414*** -0.0118*** 0.0205

* Significant at the 0.1 level. ** Significant at the 0.05 level. *** Significant at the 0.01 level.

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Conclusion

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Du point de vue dun investisseur, un des principaux enseignements dcoulant des travaux est que les rachats dactions peuvent tre perus comme une assurance sur le capital au regard du soutien de cours effectu par les socits. Cette assurance sajoute aux rmunrations explicites perues par les actionnaires, notamment les dividendes. Dans la stratgie de soutien de cours, les contrats de liquidit jouent un rle important tandis que leur contribution dans la rduction des cots de transaction est mineure. Cela peut expliquer pourquoi la majorit des socits forte capitalisation fait appel aux contrats de liquidit. De surcrot, le timing et lampleur des interventions des socits sur leurs propres actions peuvent fournir une information intressante sur la valeur de laction. En effet, les socits conditionnent leurs rachats dactions aux variations de cours seulement si laction est juge sous-value. Les investisseurs pourraient estimer la valeur de laction et dterminer une stratgie dinvestissement sur la base de cette information. Pour autant, les travaux ne font pas tat dune asymtrie dinformation forte lavantage des socits. Ces dernires ne font dailleurs pas de profits significatifs sur le long terme. Il nest donc pas possible dattribuer un pouvoir prdictif aux rachats dactions des socits sur la rentabilit future des actions. Cette absence dasymtrie dinformation peut galement donner confiance aux investisseurs dans le march. Du point de vue du rgulateur, les travaux offrent, mon sens, une image plus claire des enjeux et des problmatiques lis au rachat dactions et en particulier aux contrats de liquidit. Un point qui nest pas sans intrt pour lautorit de rgulation est limpact du changement de rglementation en 2004 sur les comportements des socits. La comparaison directe ne fait pas lobjet de cette thse, cependant elle mriterait dtre tudie. Par exemple, linterdiction des ventes et la rduction des objectifs ont-elles affect la stratgie de rachat dactions des socits ?

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Trs tt, la COB a mis en place un cadre rglementaire pour les rachats dactions en France, estimant que les avantages seraient plus importants que les cots. Encore fallait-il avoir une estimation des cots et pouvoir les mesurer. Ultrieurement, lAMF a considr que les contrats de liquidit taient bnfiques au march et que cette pratique mritait dtre maintenue au-del de 2004. Plusieurs autorits de rgulation europennes se sont inspires de cet exemple pour introduire, sur leurs marchs, une pratique de march similaire. Les conclusions de mes travaux peuvent amener lAMF sinterroger sur la pertinence des contrats de liquidit et sur leur finalit. Dans une perspective plus large, il nest pas inutile de sinterroger sur la place des contrats de liquidit sur les marchs liquides, tels que ceux des grosses capitalisations. Lanalyse montre que les contrats de liquidit participent activement la stratgie de soutien de cours. Pour autant, ds linstant o ils napportent au march ni la liquidit quils sont censs fournir ni une rduction de la volatilit, la question de leur utilit peut tre lgitimement pose. En outre, depuis la cration des contrats de liquidit, des volutions technologiques ont merg avec notamment le trading algorithmique haute frquence. Ces traders algorithmiques se prsentent comme des market makers, se vantant dapporter de la liquidit sur les marchs grce leurs stratgies. La question pourrait tre ainsi formule : les contrats de liquidit ont-ils intgr ces innovations technologiques ? Dans la ngative, serait-ce lincapacit concurrencer les traders algorithmiques dans lapport de liquidit 41 qui a conduit les contrats de liquidit se tourner vers une stratgie de soutien de cours ou la stratgie de soutien de cours serait-elle convenue, ds lorigine, entre les contrats de liquidit et la socit ?

En supposant bien videmment que les traders algorithmiques apportent effectivement de la liquidit au march.

41

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Sur le plan acadmique, mes travaux dressent un panorama du comportement des socits qui rachtent leurs actions et des contrats de liquidit. Ltape naturelle suivante devrait porter sur lidentification de la stratgie optimale dexcution dun programme de rachat dactions sous contrainte, par exemple, de la minimalisation du cot. Un modle doptimisation dynamique construit sur toute la dure du programme permettrait daboutir cette finalit. La stratgie optimale pourrait tre applique par les socits qui planifieraient alors leurs oprations au dbut du programme et pour toute sa dure. Ltude de cette problmatique est actuellement en cours. Un autre projet dtude porte sur le contrat de liquidit et, plus particulirement, sur la relation contractuelle entre le broker et la socit. La thorie des contrats peut permettre de comprendre la raison pour laquelle les contrats de liquidit adoptent une stratgie de soutien de cours plutt quune stratgie dapport de liquidit au march. Une hypothse peut tre formule selon laquelle le soutien de cours a un rsultat plus visible et plus facilement mesurable par la socit que lapport de liquidit. De la sorte, les socits peuvent indexer la rmunration des contrats de liquidit hauteur de limpact de ces derniers sur les cours de bourse des actions.

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Vu le Prsident, Vu les suffragants, Madame GINGLINGER, Madame DECLERCK, Monsieur HAMON, Monsieur FRANCQ, Monsieur GAJEWSKI, Vu et permis dimprimer le Vice-prsident du Conseil Scientifique Charg de la Recherche de lUniversit Paris Dauphine.

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