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Stock Repurchase by Tender Offer: An Analysis of the Causes of Common Stock Price Changes
Author(s) -
MASULIS RONALD W.
Publication year - 1980
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/j.1540-6261.1980.tb02159.x
Subject(s) - commission , stock exchange , stock (firearms) , accounting , capital market , business , stock market , law , economics , political science , finance , history , context (archaeology) , archaeology
THIS study analyzes the effects of a repurchase of stock by tender offer, a firm action often compared to a cash dividend, because both actions involve a cash flow from the firm to its common stockholders. Firms can repurchase common stock through: (1) privately negotiated purchases, (2) purchases in the secondary market, or (3) tender offers. Of the three methods, tender offers generally involve the largest repurchases of stock and as a consequence are the most promising form of stock repurchase for empirical study. While an issuer tender offer for common stock is similar to a cash dividend, the analogy clearly is not complete, since: (1) A stock repurchase is generally taxed as a capital gain (or loss) while a dividend is taxed as ordinary income in its entirety. (2) A stock repurchase requires an associated decrease in total slfares outstanding while a dividend does not. (3) A stock repurchase is a voluntary transaction by individual shareholders which generally alters relative shareholdings, while a dividend is involuntary and has no effect on relative shareholdings. (4) A right to tender is nontransferable and its value can only be realized by tendering shares or selling shares in the secondary market prior to offer expiration, while a dividend is received by all shareholders. Stock repurchases by tender offer can cause major adjustments in firms' capital structures by increasing leverage and significantly modify stockholders' personal tax liabilities and relative share ownership. Yet, there is little evidence in the literature concerning the price impacts on the firm's securities of the announcement and expiration of tender offers. In the process of bridging this gap, we hope to be able to gain some insights into the effects of capital structure and dividend policy changes.