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Equity Undervaluation and Decisions Related to Repurchase Tender Offers: An Empirical Investigation

Authors

  • Ranjan D'mello,

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    • D'Mello is from the University of New Orleans, and Shroff is from the University of Minnesota. This paper has benefited from comments provided by René Stulz (the editor), anonymous referees, Anil Arya, Eli Bartov, Peter Easton, John Fellingham, Thomas George, Laurie Hodrick, S. Maheswaran, Anil Makhija, Catherine Niden, James Ohlson, Stephen Penman, John Persons, Douglas Schroeder, Theodore Sougiannis, Oranee Tawatnuntachai, Ralph Walkling, Gerald Whitney, David Williams, Richard Young, and participants of seminars at University of British Columbia, Boston University, the University of Minnesota, Ohio State University, SUNY-Buffalo, the American Accounting Association National Conference, and the Financial Management Association Conference.
  • Pervin K. Shroff

    Search for more papers by this author
    • D'Mello is from the University of New Orleans, and Shroff is from the University of Minnesota. This paper has benefited from comments provided by René Stulz (the editor), anonymous referees, Anil Arya, Eli Bartov, Peter Easton, John Fellingham, Thomas George, Laurie Hodrick, S. Maheswaran, Anil Makhija, Catherine Niden, James Ohlson, Stephen Penman, John Persons, Douglas Schroeder, Theodore Sougiannis, Oranee Tawatnuntachai, Ralph Walkling, Gerald Whitney, David Williams, Richard Young, and participants of seminars at University of British Columbia, Boston University, the University of Minnesota, Ohio State University, SUNY-Buffalo, the American Accounting Association National Conference, and the Financial Management Association Conference.

Abstract

This paper tests whether managers repurchase stock when their assessment of the firm's economic value exceeds the market value. Using the forecasts managers would have if they had perfect foresight, we estimate economic value using an earnings-based valuation model. The major findings are as follows: (1) 74 percent of the firms that repurchase shares via fixed-price tender offers are undervalued relative to their preannouncement economic value; this percentage is significantly lower for a control sample, (2) the tender premium is highly correlated with the magnitude of undervaluation, and (3) the decision to satisfy oversubscription demand is influenced significantly by the magnitude of undervaluation.

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