Uri Loewenstein
University of Utah, Salt Lake City, UT 84112
James J.D. Wang
Duke University, Durham, NC 27708
ABSTRACT
This paper presents a model of Dutch auction share repurchases. The basic premises of the model are that (i) the underlying asset (the firm's common stock) is divisible in nature and therefore the shareholders' tenders take the form of price-quantity pairs; and that (ii) tendering decisions made by the firm's large shareholders reflect their significant market power. The model yields predictions about the relationship between firm characteristics (in terms of the repurchase premium and the aggregate supply elasticity).
We found empirical support for the existence of strategic tendering Dutch auction share repurchases. The size of repurchase premium decreases with the number of blockholders and increases with the percentage of shares held by blockholders. The aggregate supply elasticity increases with the number of blockholders and decreases with the percentage of shares held by blockholders. The firms set minimum repurchasing premium in order to attract greater participation on the part of the smaller investors. We find that the minimum premium promised by the firm increases with the percentage of shares held by blockholders and increases with the fraction of shares sought by the firm.