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.

Aït‐Sahalia (1996) and Stanton (1997) use nonparametric estimators applied to short‐term interest rate data to conclude that the drift function contains important nonlinearities. We study the finite‐sample properties of their estimators by applying them to simulated sample paths of a square‐root diffusion. Although the drift function is linear, both estimators suggest nonlinearities of the type and magnitude reported in Aït‐Sahalia (1996) and Stanton (1997) . Combined with the results of a weighted least squares estimator, this evidence implies that nonlinearity of the short rate drift is not a robust stylized fact.