Stock Repurchase by Tender Offer: An Analysis of the Causes of Common Stock Price Changes RONALD W. MASULIS* I. Introduction THIS study analyzes the effects of a repurchase of stock by tender offer, a firm action often compared to a cash dividend, because both actions involve a cash flow from the firm to its common stockholders. Firms can repurchase common stock through (1)privately negotiated purchases, (2) purchases in the secondary market, or (3) tender offers. Of the three methods, tender offers generally involve the largest repurchases of stock and as a consequence are the most promising form of stock repurchase for empirical study. While an issuer tender offer for common stock is similar to a cash dividend, the analogy clearly is not complete, since: (1) A stock repurchase is generally taxed as a capital gain (or loss) while a dividend is taxed as ordinary income in its entirety. (2) A stock repurchase requires an associated decrease in total shares outstanding while a dividend does not. (3) A stock repurchase is a voluntary transaction by individual shareholders which generally alters relative shareholdings, while a dividend is involuntary and has no effect on relative shareholdings. (4) A right to tender
The Journal of Finance – Wiley
Published: May 1, 1980
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