Does Stock Price Elasticity Affect Corporate Financial Decisions?

Abstract

This paper considers whether stock price elasticity affects corporate financial decisions. Basic economic principles and the existing theoretical literature suggest that firms choosing the Dutch auction instead of the fixed price tender offer are those firms that expect to face greater stock price elasticity. While the average realized elasticities of the firms conducting the various tender offers between 1984 and 1989 fail to be significantly different, multivariate econometric analysis suggests that firms choosing the Dutch auction instead of the fixed price tender offer are indeed those firms that expect to face greater stock elasticity. The expected elasticity remains an important determinant of the tender offer choice even when allowing for firm characteristics associated with the choice of repurchase method. Firms facing greater elasticity are also characterized. The findings suggest that expected stock price elasticity may be an important determinant of corporate financial decisions that affect the supply of or demand for stock.