Ranjan D'mello (University of New Orleans,) Pervin K. Shroff (University of Minnesota)
Abstract
This paper tests whether managers repurchase stock when their assessment of the firm's economic value exceeds the market value. Using the forecasts managers would have if they had perfect foresight, we estimate economic value using an earnings-based valuation model. The major findings are as follows: (1) 74 percent of the firms that repurchase shares via fixed-price tender offers are undervalued relative to their preannouncement economic value; this percentage is significantly lower for a control sample, (2) the tender premium is highly correlated with the magnitude of undervaluation, and (3) the decision to satisfy oversubscription demand is influenced significantly by the magnitude of undervaluation. Copyright The American Finance Association 2000.
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Volume (Year): 55 (2000) Issue (Month): 5 (October) Pages: 2399-2424 Download reference. The following formats are available: HTML
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