Adverse Information and Dealer Spreads: Evidence from Dutch Auction Repurchases

The Dutch auction repurchase has become an increasingly popular alternative to open market repurchases and self-tender offers for the distribution of earnings to shareholders. In a Dutch auction, the repurchase price is not determined by a managerial decision, but by shareholders. The extent to which a Dutch auction signals private information is tested by examining stock returns and bid-ask spreads. Stock prices increase and bid-ask spreads widen during the announcement of a Dutch auction; prices decrease and spreads narrow at expiration. Because of the uncertainty surrounding the final repurchase price, Dutch auctions initially increase the risk to which security dealers are exposed. As information asymmetry among managers, investors, and dealers is reduced at expiration, security dealers no longer need to protect themselves from information trades.