The timing of and motivation for tender offer stock repurchases

This dissertation tests theories explaining why stock repurchases occur. Personal tax savings hypotheses argue that managers minimize shareholder tax liability on corporate cash payments by repurchasing shares rather than by paying out dividends. Signaling hypotheses propose that managers signal favorable information about the firm by repurchasing stock at a premium to its market price. The insider trading substitute hypothesis holds that managers repurchase stock with the expectation of making positive abnormal profits from their holdings in the firm. According to agency hypotheses, a stock repurchase aligns the interests of managers and investors and reduces agency costs, thereby increasing firm value. Takeover defense hypotheses present different ways by which a stock repurchase can deter existing or potential hostile takeover threats. Previous studies have attempted to discriminate between these hypotheses by testing their valuation implications. This paper, by also studying the timing implications of repurchases under the alternative hypotheses, provides further insight into why repurchases occur. Tests in this dissertation reject the insider trading substitute hypothesis and support the signaling and agency hypotheses. They also show that the incentive to repurchase stock is not primarily determined by personal tax savings.