Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity



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    • From the Department of Finance, Northwestern University. I would like to thank Kyle Bagwell, Doug Bernheim, Dave Brown, Harry DeAngelo, Mike Fishman, Kathleen Hagerty, Bob Hodrick, Ken Judd, Narayana Kocherlakota, two anonymous referees and René Stulz (the editor) for their comments. I also thank the seminar participants at Duke, Indiana, Northwestern, Ohio State, Princeton and Stanford Universities, the Universities of Chicago and Michigan, the 1991 NBER Summer Institute on Corporate Finance and Banking and the Sixth World Congress of the Econometric Society. I am grateful to Donald Jacobs for his assistance in obtaining the data and to Latha Ramchand for her research assistance. Financial support from National Science Foundation Grant SES-8821666 is gratefully acknowledged.


This paper documents that firms face upward-sloping supply curves when they repurchase shares in a Dutch auction, and it analyzes the market reaction to these offers. The announcement price increase is highly correlated with the ultimate repurchase premium. Prices decline at expiration only for pro-rated offers. The cumulative return is positive and highly correlated with the repurchase premium, excepting pro-rated offers. Much of this price increase is consistent with movement along an upward-sloping supply curve. Trading volume around the Dutch auction parallels fixed-price repurchases. Supply elasticity is larger for firms with large trading volume, firms included in the S&P 500 Index, and takeover targets.