Determinants of Premiums on Self-Tender Offers

We investigate why firms pay a premium when making a tender offer to repurchase shares, and if the size of the premium is related to the elasticity of the supply curve for the firm stock. We find that premiums on self-tender offers are related to characteristics of tendering firms, and to variables that are proxies both for the capital gains and for the information content of the announcement. Our results indicate that stock price inelasticity, caused by taxes, is an important determinant of offer premiums for fixed-price self-tender offers. We also find that the information conveyed by the offer measured by the post-expiration appreciation of the firm stock, is contained in the tender offer premium, and that offer premiums are inversely related to firm size and to pre-offer stock performance. In addition, we present evidence that share repurchase tender offers may frequently be oversubscribed by design.