Equity undervaluation and decisions related to repurchase tender offers: An empirical investigation

Ranjan D'Mello, Pervin K. Shroff

Research output: Contribution to journalArticle

91 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)2399-2424
Number of pages26
JournalJournal of Finance
Volume55
Issue number5
DOIs
StatePublished - Oct 2000

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