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Insider Signaling and Insider Trading with Repurchase Tender Offers

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  • Fried, Jesse M

Abstract

Cash distributed to public shareholders is distributed through three mechanisms: dividends, open market repurchases (OMRs), and repurchase tender offers (RTOs). The leading explanation for why a corporation would distribute cash through an RTO rather than an OMR or a dividend is the "signaling theory"-that managers use RTOs to signal that the stock is underpriced. The Article has three main purposes: (1) to challenge the signaling theory, by exposing a flaw in one of its key assumptions and presenting empirical data suggesting that the theory cannot account for most RTOs; (2) to show that the same empirical data are consistent with insiders using RTOs to engage in insider trading with public shareholders; and (3) to propose that insiders be (a) required to disclose their tendering decision before the close of the RTO and (b) forbidden from selling stock outside of the RTO until six months after the announcement date. The Article explains how this "disclose/delay" rule would substantially reduce insiders' ability to use RTOs for insider trading, without interfering with the use of RTOs for any other purpose (including signaling).

Suggested Citation

  • Fried, Jesse M, 2000. "Insider Signaling and Insider Trading with Repurchase Tender Offers," Berkeley Olin Program in Law & Economics, Working Paper Series qt74m8n14z, Berkeley Olin Program in Law & Economics.
    • Handle: RePEc:cdl:oplwec:qt74m8n14z
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    Cited by:

    1. Louis, Henock & White, Hal, 2007. "Do managers intentionally use repurchase tender offers to signal private information? Evidence from firm financial reporting behavior," Journal of Financial Economics, Elsevier, vol. 85(1), pages 205-233, July.
    2. Wang, Kun Tracy & Wang, Wanbin Walter, 2017. "Competition in the stock market with asymmetric information," Economic Modelling, Elsevier, vol. 61(C), pages 40-49.
    3. Kräussl, Roman & Pollet, Joshua M. & Stefanova, Denitsa, 2023. "Closed-end funds and discount control mechanisms," CFS Working Paper Series 707, Center for Financial Studies (CFS).
    4. Lazonick, William, 2012. "Financialization of the U.S. corporation: what has been lost, and how it can be regained," MPRA Paper 42307, University Library of Munich, Germany, revised 29 Oct 2012.
    5. Dimitrios I. Maditinos & Alexandra V. Tsinani & Željko Šević, 2015. "Managerial optimism and the impact of cash flow sensitivity on corporate investment: The case of Greece," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 8(2), pages 35-54, October.
    6. Wang, Zigan & Yin, Qie Ellie & Yu, Luping, 2021. "Real effects of share repurchases legalization on corporate behaviors," Journal of Financial Economics, Elsevier, vol. 140(1), pages 197-219.
    7. Kräussl, Roman & Pollet, Joshua & Stefanova, Denitsa, 2018. "Signaling or marketing? The role of discount control mechanisms in closed-end funds," CFS Working Paper Series 597, Center for Financial Studies (CFS).
    8. Ota, Koji & Lau, David & Kawase, Hironori, 2022. "Signal strength adjustment behavior: Evidence from share repurchases," Journal of Banking & Finance, Elsevier, vol. 143(C).
    9. Laurel Franzen & Xu Li & Oktay Urcan & Mark E. Vargus, 2014. "The Market Response To Insider Sales Of Restricted Stock Versus Unrestricted Stock," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 37(1), pages 99-118, February.
    10. William Lazonick, 2012. "Corporate Governance, Innovative Enterprise and Executive Pay," Chapters, in: Michael Dietrich & Jackie Krafft (ed.), Handbook on the Economics and Theory of the Firm, chapter 25, Edward Elgar Publishing.
    11. Rebel A. Cole & Travis Davidson & Hongxia Wang, 2021. "Why do bank holding companies purchase bank-owned life insurance?," Review of Quantitative Finance and Accounting, Springer, vol. 57(1), pages 29-59, July.
    12. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    13. Henock Louis & Amy X. Sun & Hal White, 2010. "Insider Trading after Repurchase Tender Offer Announcements: Timing versus Informed Trading," Financial Management, Financial Management Association International, vol. 39(1), pages 301-322, March.

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