A Test for Price Pressure Effects in Tender Offer Stock Repurchases

The evidence in this paper supports the hypothesis that the previously documented stock price reversal following a tender offer announcement is consistent with a price pressure caused by a temporary shift in the security's demand curve. The authors came to this conclusion by redocumenting the price reversal, by finding an increase in trading volume around the tender offer announcement and expiration, by showing the increase in volume to be larger than expected from only an information effect, and by showing that short selling activity increases after the announcement and before the expiration of the tender offer.     

The Stock Market Reaction to Significant Tender Offer Repurchases of Stock: Size and Purpose Perspective

This paper uses event methodology to examine the impact of common stock repurchases on the repurchasing firm's common stock returns, including examination of various subsamples to test the effects of size and purpose of repurchase. Although the market reacts positively to general repurchase announcements, it reacts negatively to those repurchases used to fend off takeover attempts and does not react at all to stock repurchases for employee stock option plan (ESOP) purposes.     

Capital Gains Taxes and Stockholders' Response to Dutch Auction Tender Offers

Capital gains taxes are conjectured to explain upward sloping supply curves in tender offers. This paper analyzes expiration day returns in Dutch auction tender offers to examine this conjecture. A proxy measure for the capital gains of the marginal tendering stockholder is constructed, based on tender offer size and daily price-volume history for one year. Cross-sectional regressions suggest that the tender price increases with the capital gains of the marginal tenderer, but only for firms with low institutional holdings. This is consistent with capital gains tax effects being relevant only when tax-exempt holdings are low.     

Open‐Market Stock Repurchases by Insurance Companies and Signaling

The signaling hypothesis of share repurchases implies that management uses repurchases to signal either that their firm's future operating performance will improve or that shares of their stock are simply underpriced by the market. This study examines which of the two interpretations can better explain open‐market share repurchase programs announced by insurance companies. We find no evidence that future‐operating performance of insurers improves following the repurchase announcement. In addition, changes in future operating performance cannot explain the announcement‐period abnormal return. Instead, the stock undervaluation prior to the repurchase announcement can significantly explain the announcement‐period abnormal return, particularly for life insurers. Overall, our results suggest that the positive market reaction to insurers’ open‐market share repurchase announcements is due to the stock undervaluation by the market, but not due to positive information content about future operating performance conveyed in the repurchase announcement.     

A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchases and Dividends

This paper develops a model in which managers can signal their firms' true values by using either a dividend or a stock repurchase or both. The authors explain a number of stylized facts about these cash-disbursement mechanisms, particularly those concerning the relative magnitudes of stock price responses to dividends and repurchases. Most importantly, they explain why a stock repurchase elicits a significantly higher price response, on average, than a dividend announcement.     

Stock Repurchases in Canada: Performance and Strategic Trading

During the 1980s, U.S. firms announcing stock repurchases earned favorable long-run returns. Recently, concerns have been raised over the robustness of these findings. This concern comes at a time of explosive growth in repurchase programs. Thus, we study new evidence from the 1990s for 1,060 Canadian repurchase programs. Moreover, because of Canadian law, we can carefully track repurchase activity monthly. Similarly to the situation in the United States, the Canadian stock market discounts the information in repurchase announcements, particularly for value stocks. Completion rates in Canada are sensitive to mispricing. Trades also appear linked to price movements; managers buy more shares when prices fall.     

Stock Repurchases and Excess Returns: An Empirical Examination

The excess returns associated with repurchase announcements are viewed largely as a reaction to management's statement that the firm's shares are underpriced; management's signal provides new information that enhances the firm's market value. Although earlier studies have found the excess return to be closely related to the premium set by managment, other factors play a part in determining both the market reaction and the premium level set by management. Among these factors ar relative market capitalization, holdings by institutions, immediate alternative uses for cash, level of insider control, recent stock price performance, relative size of the tender offer, and the resultant change in the firm's capital structure.     

Tender Offers and Free Cash Flow: An Empirical Analysis

High free cash flow firms are characterized by a mismatch between growth opportunities and resources. High free cash flow target firms receive higher-than-average abnormal returns. Target returns are lower when the bidder is a high free cash flow firm. During the 1970s, results suggested that cash-flow-rich bidding firms pursued low-benefit takeovers. During the 1980s, high free cash flow firms became the targets of tender offers. Results are consistent with the notion that reducing agency problems in target firms generates benefits and that bidding firms with large free cash flow undertake low-benefit acquisitions.     

Efficient Signalling with Dividends,Investment, and Stock Repurchases

The efficient mix of dissipative dividends, investments in real and financial assets, and repurchases of stock is computed for a continuum of firms with inside information about the return on risky real assets. In the efficient signalling equilibrium, the representative firm optimally distributes dividends, invests in risky real assets to maximize net present value, holds no financial securities, and sells new stock in the market. This firm finances its value-maximizing investment first from internal funds and second from stock sold to new investors.     

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.     

Equity Undervaluation and Signaling Power of Share Repurchases with Legal Restrictions

This paper analyzes share repurchase programs, which are subject to specific legal restrictions in Taiwan, to determine whether the unique item repurchase price range conveys information regarding the degree of undervaluation and future prospects of a firm. We find that the price range conveys such information, not only about the past, but also the future. Companies with a higher upper bound of the repurchase price range experience better abnormal returns than do companies that do not. The lower bound of the price range does not efficiently convey the undervaluation effect, owing to the exemption clause in the announcement. Finally, the announced price range, in turn, conveys favorable information about the repurchasing firm and is a more powerful signal of future prospects than is the legal price range.     

Corporate Cash Policy and How to Manage it with Stock Repurchases

At the end of 2004 total U.S. corporate cash holdings reached an all‐time high of just under $2 trillion—an amount equal to roughly 15% of the total U.S. GDP. And during the past 25 years, average cash holdings have jumped from 10% to 23% of total corporate assets. But at the same time their levels of cash have risen, U.S. companies have paid out dramatically increasing amounts of cash to buy back shares. This article addresses the following questions: What accounts for the dramatic increase in the average level of corporate cash holdings since 1980? And why do some companies keep so much cash (with one fourth of U.S. firms holding cash amounting to at least 36% of total assets) while others have so little (with another quarter having less than 3%)? Why do companies pay out excess cash in the form of stock repurchases (rather than, say, dividends), and what explains the significant increase in repurchases (both in absolute terms and relative to dividends) over time? The author begins by arguing that cash reserves provide companies with a buffer against possible shortfalls in operating profits—one that, especially during periods of financial trouble, can be used to avoid financial distress or provide funding for promising projects that might otherwise have to be put off. Such buffers are particularly valuable in the case of smaller, riskier companies with lots of growth opportunities and limited access to capital markets. And the dramatic increase in corporate cash holdings between 1980 and the present can be attributed mainly to an increase in the risk of publicly traded companies—an increase in risk that reflects in part a general increase in competition, but also a notable change over time in the kinds of companies (smaller, newer, less profitable, non‐dividend paying firms) that have chosen to go public. At the other end of the corporate spectrum are large, relatively mature companies with limited growth opportunities. Although such companies tend to produce considerable free cash flow, they also tend to retain relatively small amounts of cash (as a percentage of total assets), in part because of shareholder concern about the corporate “free cash flow problem”—the well‐documented tendency of such companies to destroy value through overpriced (often diversifying) acquisitions and other misguided attempts to pursue growth at the expense of profitability. For companies with highly predictable earnings and investment plans, dividends provide one means of addressing the free cash flow problem. But for companies with more variable earnings and less predictable reinvestment, open‐market stock repurchases provide a more flexible means of distributing cash to shareholders. Unlike the corporate “commitment” implied by dividend payments, an open market stock repurchase program creates what amounts to an option but not an obligation to distribute funds. The value of such flexibility, which increases during periods of increased risk and uncertainty, explains much of the apparent substitution of repurchases for dividends in recent years.     

Equity Ownership and Firm Value: Evidence from Targeted Stock Repurchases

In contrast to the negative average abnormal return associated with the announcement of a control‐related targeted repurchase (greenmail transaction), we find that the announcement of a noncontrol‐related targeted repurchase is associated with a positive and significant average abnormal return. Cross‐sectional analysis indicates that the change in firm value at the announcement of a noncontrol‐related targeted repurchase is negatively related to the resulting changes in both insider ownership and outside blockholdings. We also find significant differences in announcement‐period stock price effects depending on the identity of the selling shareholder.     

Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions

We contribute to the debate on the optimal design of multiunit auctions by developing and testing robust implications of the leading theory of uniform price auctions on the bid distributions submitted by individual bidders. The theory, which emphasizes market power, has little support in a data set of Finnish Treasury auctions. A reason may be that the Treasury acts strategically by determining supply after observing bids, apparently treating the auctions as a repeated game between itself and primary dealers. Bidder behavior and underpricing react to the volatility of bond returns in a way that suggests bidders adjust for the winner's curse.     

Tender Offers and Target Management Responses: Managerial Entrenchment Versus Stockholder Interest Revisited

Defensive actions by managements facing hostile tender offers have generally been interpreted as entrenchment-oriented behavior. In this paper, longitudinal wealth effects on target firm stockholders are examined for the 1978–1985 period. The sample of firms where target management resists the tender offer registers significantly higher post-tender offer announcement gains as compared to the sample of firms where target management remains passive. The evidence appears to support the stockholder interest hypothesis.     

Price and Probability: Decomposing the Takeover Effects of Anti-Takeover Provisions

We study the effects of anti-takeover provisions (ATPs) on the takeover probability, the takeover premium, and target selection. Voting to remove an ATP increases both the takeover probability and the takeover premium, that is, there is no evidence of a trade-off between premiums and takeover probabilities. We provide causal estimates based on shareholder proposals to remove ATPs and address the endogenous selection of targets through bounding techniques. The positive premium effect in less protected firms is driven by better bidder-target matching and merger synergies.     

Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers

We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal returns. This result is difficult to explain outside of an adverse selection framework.     

Stock Splits: Prior and Subsequent Price Relationships

Although it has long been recognized that a stock split merely changes the packaging of an investor's claim to earnings, there is widespread belief in the financial community that the split confers some substantive benefits on stockholders. This paper describes an empirical investigation of the effect of split action on stock price. The split action was found to have an insignificant effect, even at a 10% level, on changes in market price over the 12 month period surrounding the split.