Trading Profits in Dutch Auction Self-Tender Offers

Abstract

We document abnormal trading profits in Dutch auction self-tenders. Tender period profits-buying after announcement and selling just before expiration-are 1.74 percent (Bhagat, Brickley, and Lowenstein (1987) report similar profits for interfirm tenders). Buying just before expiration and tendering yields abnormal profits of 1.36 percent (Lakonishok and Vermaelen (1990) report 9 percent for fixed-price self-tenders using a filter rule). Total profits from buying just after announcement and tendering remain positive after adjusting for bid-ask spreads. Trading profits are higher for smaller firms, and positively correlated with tender period unsystematic risk, suggesting that they arise due to the pricing of event risk. Two RECENT PAPERS DOCUMENT that abnormal profits can be earned by trading in the shares of firms subject to a tender offer. Bhagat, Brickley, and Lowenstein (1987) examine interfirm tender offers, and report a cumulative abnormal return of about 2 percent to a strategy of buying shares two days after announcement of the offer, and selling on the day before expiration. They point out that, due to a substantial decline in beta during the tender period, the return of 2 percent is an underestimate of abnormal profits. For fixed-price self-tenders, Lakonishok and Vermaelen (1990) find that buying shares just before expiration (using a simple filter rule), and tendering, generates abnormal returns of more than 9 percent. The abnormal returns are positive for more than 90 percent of the trades, and have not declined over time; they are 11 percent during 1980 to 1986 compared with 8 percent during 1962 to 1979. Taken together, this evidence calls into question the efficiency of market