Essays on repurchases and tender offers.

Abstract

This thesis examines stock repurchases. Chapter 1 begins the study by discussing and testing several possible motivations for stock buy backs, including firm undervaluation, changes in firm capital structure, expropriation from debtholders, distribution of free cash flow, and signalling informed insiders' asymmetric information to the market. Empirical tests of these hypothesized motivations are consistent with undervaluation and signalling reductions in firm risk, but inconsistent with the capital structure, expropriation, and free cash flow hypotheses. The remainder of the thesis focuses on the determinants of repurchase premiums. Chapter 2 begins with a discussion of the mechanics of share repurchase, before developing two competing hypotheses regarding repurchase premiums. The first is the liquidity hypothesis, which posits that supply curves for shares are perfectly elastic, and repurchase premiums are a function of the substitutability and liquidity of the stock. The heterogeneity hypothesis, in contrast, holds that supply curves for shares are upward-sloping, and repurchase premiums are a function of any factor that affects either the slope of the supply curve or the demand for shares along the supply curve. Chapter 2 concludes by developing a formal model of repurchase premiums, for use in empirical tests of the alternative hypotheses, which are conducted in Chapter 3. Results of these tests are inconsistent with the liquidity hypothesis, as repurchase premiums are not found to be a function of substitutability or liquidity. Repurchase premiums, however, are consistent with the heterogeneity hypothesis, as they are found to be a significant function of the variability of stockholder consensus about the stock, and the variability of the capital gains tax lock-in effect between shareholders.