Empirical Evidence On The Motivation For Dutch Auction Versus Fixed Price Tender Offers

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-hyphenate: none;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Batang;">Persons (1994) presents a model in which firms choose between the Dutch auction and fixed price repurchase methods.<span style="mso-spacerun: yes;">  </span>We examine the empirical implications of the model and document a number of findings that are consistent with the model. For instance, takeover activity prior to repurchase announcements is significantly higher for firms announcing Dutch auctions.<span style="mso-spacerun: yes;">  </span>However, takeover activity significantly declines after Dutch auctions but is not significantly different after fixed price offers.<span style="mso-spacerun: yes;">  </span>Moreover, using a logistic regression analysis, we find that Dutch auctions are more likely to be adopted by large firms with low Tobin’s q ratios, low inside ownership, and that were subject to prior takeover pressure.<span style="mso-spacerun: yes;">  </span>When we split the sample between repurchases with and without prior takeover activity, we find that repurchases without prior takeover activity result in a permanent increase in value while those with prior takeover activity result in only a temporary increase in value.<span style="mso-spacerun: yes;">  </span>We also find that the higher incidence of takeover battles following defensive fixed price repurchases results in lower post-repurchase returns relative to defensive Dutch auctions.<span style="mso-spacerun: yes;">  </span>These findings indicate that if the repurchase is used as a takeover deterrent, Dutch auctions are the more effective repurchase method.</span></span></span></p>