An empirical analysis of the motivations for and wealth effects of fixed price and Dutch auction self-tender offers
Abstract
This study investigates the motivations for and the wealth effects of 150 fixed price and 110 Dutch auction self-tender offers from the period 1981 to 1994. Like earlier studies, I find significantly positive abnormal returns around the announcements of the self-tender offers. However, unlike earlier studies, I find no evidence of either earnings performance increases or systematic risk decreases following the announcements. Further, I find no significant relation between announcement period returns and the changes in performance and risk. Interestingly, these results are similar for fixed price and Dutch auction self-tender offers. Consistent with the predictions of the capital structure adjustment hypothesis, I find that (1) the industry-adjusted debt ratio typically decreases prior to the announcement of self-tender offers, and (2) the prior decrease in debt ratio is positively related to announcement period returns for both types of self-tender offers. Consistent with the predictions of the excess cash hypothesis, I find that (1) the cash level is higher than the industry norm in the years prior to the announcements of both types of self-tender offers, (2) the cash level tends to increase in the years prior to fixed price self-tender offers, and (3) the announcement period returns are higher for firms with both large cash levels and poor investment opportunities, as measured by Tobin's Q. Furthermore, I show that firms conducting Dutch auction self-tender offers pay on average a lower premium over the pre-announcement stock price, and the stock price responds more favorably to Dutch auction than to fixed price self-tender offers. Further examination indicates that these findings may partially be due to a higher probability that Dutch auction self-tender offers will qualify for preferential tax treatment. I also find that firms are more likely to use fixed price than Dutch auction self-tender offers in response to takeover activity, after a decline in debt ratio, and when the slope of the supply curve for the firm's shares is steep. Finally, there is strong evidence that Dutch auction self-tender offers have become more popular over time.
Degree
Ph.D.
Advisors
McConnell, Purdue University.
Subject Area
Finance
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