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Heterogenous Shareholders and Signaling with Share Repurchases

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Abstract

This paper presents an asymmetric information model of share repurchases when shareholders have heterogeneous reservation values. Consistent with empirical evidence, managers in the model repurchase shares at a premium above the post- repurchase share value - transferring wealth from shareholders who do not tender to those who do - in order to signal that the firm is undervalued. Such dilutive repurchases would not occur under the classical assumption of perfectly elastic share supply; they depend critically on shareholder heterogeneity. It is also shown that repurchases are more efficient signals that other strategies like dividends and "burning money." The model's implications are consistent with much empirical evidence regarding announcement returns, repurchase size, repurchase premiums and expiration-day price drops.

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  • John C. Persons, "undated". "Heterogenous Shareholders and Signaling with Share Repurchases," Research in Financial Economics 9502, Ohio State University.
    • Handle: RePEc:wop:ohsrfe:9502
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    1. Welch, Ivo, 1989. " Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 44(2), pages 421-449, June.
    2. Bagwell, Laurie Simon, 1991. "Shareholder Heterogeneity: Evidence and Implications," American Economic Review, American Economic Association, vol. 81(2), pages 218-221, May.
    3. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
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