Abstract
Abnormally high net insider selling is commonly observed after repurchase tender offer announcements even though firms experience, on average, positive abnormal returns in the years after the repurchases. We explore two potential explanations for this seemingly counterintuitive phenomenon. Under the first explanation, insiders trading for liquidity reasons time their selling activities with the repurchase announcements to minimize potential undervaluation, thereby maximizing their selling price. Under the second explanation, insiders trading on their private information sell shares in response to overpricing due to the market misinterpreting the degree to which certain repurchase announcements act as signals of undervaluation. Our results indicate that, consistent with the notion that fixed-price tender offers are more likely than Dutch-auction tender offers to serve as signals of undervaluation, insider selling after fixed-price tender offer announcements appears to be driven largely by insiders who time their trades with the repurchase announcements. In contrast, selling after Dutch auction tender offers seems to be driven largely by informed traders who exploit mispricing associated with the repurchase announcements.
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