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Equity Undervaluation and Decisions Related to Repurchase Tender Offers: An Empirical Investigation
Author(s) -
D'mello Ranjan,
Shroff Pervin K.
Publication year - 2000
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00292
Subject(s) - tender offer , earnings , valuation (finance) , equity (law) , business , economics , value (mathematics) , sample (material) , market value , monetary economics , fair market value , financial economics , microeconomics , finance , shareholder , corporate governance , chemistry , chromatography , political science , law , machine learning , computer science
This paper tests whether managers repurchase stock when their assessment of the firm's economic value exceeds the market value. Using the forecasts managers would have if they had perfect foresight, we estimate economic value using an earnings‐based valuation model. The major findings are as follows: (1) 74 percent of the firms that repurchase shares via fixed‐price tender offers are undervalued relative to their preannouncement economic value; this percentage is significantly lower for a control sample, (2) the tender premium is highly correlated with the magnitude of undervaluation, and (3) the decision to satisfy oversubscription demand is influenced significantly by the magnitude of undervaluation.