Empirical Evidence On The Motivation For Dutch Auction Versus Fixed Price Tender Offers

Abstract

Persons (1994) presents a model in which firms choose between the Dutch auction and fixed price repurchase methods.  We examine the empirical implications of the model and document a number of findings that are consistent with the model. For instance, takeover activity prior to repurchase announcements is significantly higher for firms announcing Dutch auctions.  However, takeover activity significantly declines after Dutch auctions but is not significantly different after fixed price offers.  Moreover, using a logistic regression analysis, we find that Dutch auctions are more likely to be adopted by large firms with low Tobin’s q ratios, low inside ownership, and that were subject to prior takeover pressure.  When we split the sample between repurchases with and without prior takeover activity, we find that repurchases without prior takeover activity result in a permanent increase in value while those with prior takeover activity result in only a temporary increase in value.  We also find that the higher incidence of takeover battles following defensive fixed price repurchases results in lower post-repurchase returns relative to defensive Dutch auctions.  These findings indicate that if the repurchase is used as a takeover deterrent, Dutch auctions are the more effective repurchase method.