Insider
Signaling and Insider Trading with Repurchase TenderOffers
67 U. CHI. L. REV 421
(2000)
Abstract
Cash
distributed to public shareholders is distributed through three mechanisms:
dividends, open market repurchases (OMRs), and repurchase tender offers
(RTOs). The leading explanation for why a corporation would distribute
cash through an RTO rather than an OMR or a dividend is the "signaling
theory"- that managers use RTOs to signal that the stock is underpriced.
The Article has three main purposes: (1) to challenge the signaling
theory, by exposing a flaw in one of its key assumptions and presenting
empirical data suggesting that the theory cannot account for most RTOs;
(2) to show that the same empirical data are consistent with insiders
using RTOs to engage in insider trading with public shareholders; and
(3) to propose that insiders be (a) required to disclose their tendering
decision before the close of the RTO and (b) forbidden from selling
stock outside of the RTO until six months after the announcement date.
The Article explains how this "disclose/delay" rule would substantially
reduce insiders' ability to use RTOs for insider trading, without interfering
with the use of RTOs for any other purpose (including signaling).