Insider Signaling and Insider Trading with Repurchase Tender Offers

58 Pages Posted: 1 Mar 2000 Last revised: 27 Sep 2010

See all articles by Jesse M. Fried

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

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 rathe 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).

Keywords: share repurchases, repurchase tender offer, insider trading, signaling, securities regulation, corporate governance

JEL Classification: K2, K22, G14, G28, G32, G35, G38, G34

Suggested Citation

Fried, Jesse M., Insider Signaling and Insider Trading with Repurchase Tender Offers. University of Chicago Law Review, Vol. 67, pp., 421-477, 2000, Available at SSRN: https://ssrn.com/abstract=212728 or http://dx.doi.org/10.2139/ssrn.212728

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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