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

44 Pages Posted: 5 Sep 2008 Last revised: 7 Sep 2008

See all articles by Henock Louis

Henock Louis

Pennsylvania State University - Smeal College of Business

Amy X. Sun

University of Houston

Hal D. White

Penn State University

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2008

Abstract

Abnormally high net insider selling is commonly observed after repurchase tender offer announcements even though firms experience, on average, positive abnormal returns in the years after the repurchases. We explore two potential explanations for this seemingly counterintuitive phenomenon. Under the first explanation, insiders trading for liquidity reasons time their selling activities with the repurchase announcements to minimize potential undervaluation, thereby maximizing their selling price. Under the second explanation, insiders trading on their private information sell shares in response to overpricing due to the market misinterpreting the degree to which certain repurchase announcements act as signals of undervaluation. Our results indicate that, consistent with the notion that fixed-price tender offers are more likely than Dutch-auction tender offers to serve as signals of undervaluation, insider selling after fixed-price tender offer announcements appears to be driven largely by insiders who time their trades with the repurchase announcements. In contrast, selling after Dutch auction tender offers seems to be driven largely by informed traders who exploit mispricing associated with the repurchase announcements.

Keywords: insider trading, repurchase

JEL Classification: G14, G35

Suggested Citation

Louis, Henock and Sun, Amy X. and White, Hal D., Insider Trading After Repurchase Tender Offer Announcements: Timing versus Informed Trading (September 1, 2008). Available at SSRN: https://ssrn.com/abstract=1263084 or http://dx.doi.org/10.2139/ssrn.1263084

Henock Louis (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Amy X. Sun

University of Houston ( email )

Bauer College of Business
334 Melcher Hall, 390H
Houston, TX 77204
United States
7137435682 (Phone)

Hal D. White

Penn State University ( email )

210 Business Building
Smeal College of Business
University Park, PA 16802-3306
United States
814-863-7055 (Phone)

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