Abstract

We develop a model of the timing of share repurchases within a duopolistic industry to analyze the dynamics of share repurchases in the context of the ‘peer effect’ documented in the extant empirical literature. Share repurchase decisions are taken as part of a broader liquidity management policy but also take into account i) the firm’s financial resources needed to invest in a potential growth opportunity, and ii) the feedback effect of the competitor’s investment threat on the firm’s willingness to hold cash to respond to such a threat. We derive the equilibrium timing of such strategic repurchases of both firms and generate a number of empirical predictions regarding the expected strength of the peer effect. Subsequently, based on the universe of Compustat firms from 1971-2019, we find empirical support for the key model predictions: the peer effect is weakened by the degree of product market competition, financial constraints, and stock illiquidity. Finally, we also present evidence of several cross-effects that are consistent with model predictions.