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Stock Repurchase as a Takeover Defense

Mark Bagnoli¹; Roger Gordon¹; Barton L. Lipman²

¹ University of Michigan–Ann Arbor · ² Carnegie Mellon University

We develop a model in which stock repurchases serve as a defense against takeovers by signaling the manager’s private information about the value of the firm. The manager repurchases shares to block a takeover only if the cost of doing so is not too high. Since the cost is inversely related to the value of the firm under his management, a repurchase signals that the value of the stock is high, blocking a takeover. While a repurchase increases the expected value of the stock, it also makes the stock riskier. The model also implies that there are too few takeovers for efficiency.

DOI

10.1093/rfs/2.3.423

Volume

2 (3)

Pages

423-443

Language

en

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BibTeX

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