Stock repurchases: How firms choose between a self tender offer and an open-market program

Jacob Oded*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

In practice, open-market stock repurchase programs outnumber self tender offers by approximately 10-1. This evidence is puzzling given that tender offers are more efficient in disbursing free cash and in signaling undervaluation - the two main motivations suggested in the literature for repurchasing shares. We provide a theoretical model to explore this puzzle. In the model, tender offers disburse free cash quickly but induce information asymmetry and hence require a price premium. Open-market programs disburse free cash slowly, and hence do not require a price premium, but because they are slow, result in partial free cash waste. The model predicts that the likelihood that a tender offer will be chosen over an open-market program increases with the agency costs of free cash and decreases with uncertainty (risk), information asymmetry, ownership concentration, and liquidity. These predictions are generally consistent with the empirical evidence.

Original languageEnglish
Pages (from-to)3174-3187
Number of pages14
JournalJournal of Banking and Finance
Volume35
Issue number12
DOIs
StatePublished - Dec 2011

Funding

FundersFunder number
Carnegie Bosch Institute
EU-IRG
William Larimer Mellon Foundation

    Keywords

    • Buyback
    • Free cash
    • Open-market program
    • Payout policy
    • Repurchase
    • Stock repurchase
    • Tender offer

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