Stock Buybacks, Speculative Trading, and Shareholder Welfare

Alvin Chen

♦ This paper studies buybacks with two informed parties: a manager and an outside speculator. Buybacks introduce two countervailing forces. A competition effect reduces speculator profits when buybacks compete against speculative trades. A dispersion effect increases speculator profits: buying undervalued shares generates gains while buying overvalued shares generates losses, widening the dispersion in per-share value across states. Sufficiently informed buybacks benefit shareholders; uninformed buybacks harm them. These effects vary with shareholders’ liquidity exposures. The desirability of informed buybacks depends on the prevalence of speculation. Authorization depends on ownership, governance, and market conditions. Shareholders might welcome informed buybacks—not merely tolerate them.

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