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Multi‐dimensional signaling with fixed‐price repurchase offers
Author(s) -
McNally William J.
Publication year - 1999
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/(sici)1099-1468(199905)20:3<131::aid-mde925>3.0.co;2-a
Subject(s) - earnings , free cash flow , leverage (statistics) , cash flow , shareholder , economics , monetary economics , operating leverage , stock (firearms) , share repurchase , enterprise value , econometrics , value (mathematics) , business , financial economics , finance , computer science , corporate governance , mechanical engineering , profitability index , engineering , machine learning
This study presents a signaling model of fixed‐price repurchase offers which shows that the proportion repurchased and the premium paid in excess of the stock's full‐information value signal both earnings and risk. The model yields four novel implications: high risk firms repurchase smaller proportions at greater premiums, earnings held constant; and high earnings firms make offers for larger proportions at higher prices, but lower premiums, risk held constant. Empirical tests support the implications, even in the presence of alternatives, e.g., free cash flow, optimal leverage, and shareholder heterogeneity. Copyright © 1999 John Wiley & Sons, Ltd.