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

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  • Oded, Jacob
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 12 ()
    Pages: 3174-3187

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:12:p:3174-3187

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Repurchase; Tender offer; Open-market program; Buyback; Payout policy; Stock repurchase; Free cash;

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    References

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    Cited by:
    1. Liang, Woan-lih, 2012. "Information content of repurchase signals: Tangible or intangible information?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 261-274.
    2. Chen, Sheng-Syan & Ho, Kim Wai & Huang, Chia-Wei & Wang, Yanzhi, 2013. "Buyback behavior of initial public offering firms," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 32-42.

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