Insider Signaling and Insider Trading with Repurchase Tender Offers

Abstract

Cash distributed to public shareholders is distributed through three mechanisms: dividends, open market repurchases (OMRs), and repurchase tender offers (RTOs

The risk-reward nexus in the innovation-inequality relationship: who takes the risks? Who gets the rewards?

“…Many of these same corporate executives as corporate decisionmakers used corporate funds to repurchase their companies' shares in the attempt to bolster their stock pricesto their own personal gain when they exercised their stock options or sold some of their shares. Given the fact that in the United States companies are not required to announce the dates on which they actually do open market repurchases of their own shares, there is an opportunity for top executives who have this information to engage in insider trading by using this information to time option exercises and stock sales (Fried 2000 and2001).…”

Insider Trading after Repurchase Tender Offer Announcements: Timing versus Informed Trading

“…RTOs provide managers with an additional opportunity to benefit from insider trading. As Fried (2000) points out, an RTO is a unique setting to examine insider trading in that it allows insiders to be somewhat sheltered from litigation since the "materiality" threshold for information disclosure is not as strong. 3 As such, RTOs can provide incentives for insiders to take advantage of their private information.…”

“…A potential explanation for the lack of insider buying is that managers who are looking for opportunities to buy undervalued shares would have no incentive to signal the undervaluation (e.g., using an RTO) before they buy. 3 Fried (2000) states, "It is important to emphasize that insiders' use of RTOs to exploit inside information does not necessarily violate the securities laws. These laws impose liability on insiders (as well as the corporation itself) if they buy or sell stock without disclosing 'material' inside information.…”

“…In addition, contrary to open market repurchases, repurchase tender offers entail substantial costs, involve outside parties, and are generally carried out, which is more consistent with credible signaling (Nayar, Singh, and Zebedee, 2008). Also, from a practical perspective, open market repurchases usually take several months to several years to complete whereas repurchase tender offers are usually completed within a month (Fried, 2000). 5 Note that trading in the months immediately following repurchase announcements may be optimal for informed traders who want to distance their selling as much as possible from forthcoming disappointing earnings and/or returns.…”

“…Finally, we partition the sample into the two types of RTOs: 1) fixed price and 2) Dutch auction tender offers. In a fixed price tender offer, the purchase price includes a premium set by the manager whereas in a Dutch auction tender offer, the manager offers a range to investors to bid for tendering with the maximum premium generally similar to the average fixed price premium (Fried, 2000). Note that the Dutch auction repurchase price is determined by the most pessimistic investors instead of the managers.…”