Journal of Banking & Finance Vol. 35 No. 12 2011
Stock repurchases: How firms choose between a self tender offer and an open-market program
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.
- DOI
- 10.1016/j.jbankfin.2011.05.006
- Volume
- 35
- Issue
- 12
- Pages
- 3174-3187
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref