Insider Signaling and Insider Trading with Repurchase Tender Offers
58 Pages Posted: 1 Mar 2000 Last revised: 27 Sep 2010
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Profits to Insider Trading: a Performance-Evaluation Perspective
By Leslie A. Jeng, Richard J. Zeckhauser, ...
-
Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective
By Leslie A. Jeng, Richard J. Zeckhauser, ...
-
Overreaction and Insider Trading: Evidence from Growth and Value Portfolios
By Michael S. Rozeff and Mir A. Zaman
-
What Insiders Know About Future Earnings and How They Use it: Evidence from Insider Trades
By Bin Ke, Steven J. Huddart, ...
-
Market Efficiency and Insider Trading: New Evidence
By Michael S. Rozeff and Mir A. Zaman
-
The Conditional Performance of Insider Trades
By B. Espen Eckbo and David C. Smith
-
Are Insiders' Trades Informative?
By Josef Lakonishok and Inmoo Lee
-
Performance Evaluation with Transactions Data: the Stock Selection of Investment Newsletters
-
Insider Trading, News Releases and Ownership Concentration
By Jana P. Fidrmuc, Marc Goergen, ...
-
Public Disclosure and Dissimulation of Insider Trades
By Steven J. Huddart, John S. Hughes, ...