Trading Profits in Dutch Auction Self-Tender Offers




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    • University of Michigan (visiting) and University of Houston, respectively. For helpful comments, we thank Laurie Bagwell, John Easterwood, Rich Pettit, Anju Seth, Ron Singer, René Stulz (the editor), P. C. Venkatesh, colleagues at the University of Houston, and participants at the 1992 Financial Management Association Meetings. Seong Hong, Lalith Samarakoon, and Ming-Jing Yang provided excellent research assistance.


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 inter-firm 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.