Share Repurchase Mechanisms: A Comparative Analysis of Efficacy, Shareholder Wealth, and Corporate Control Effects

Gerald D. Gay, Jayant R. Kale and Thomas Noe ()

Financial Management, 1991, vol. 20, issue 1

Abstract: This paper compares the dutch auction and transferable put rights (TPRs) share repurchase mechanisms to the traditional fixed-price tender offer in terms of efficiency, wealth transfers, and corporate control. Using Monte Carlo simulations, it is shown that both alternative mechanisms reduce the deadweight losses from inefficient tendering by ensuring that shareholders with the lowest reservation prices are bought out first. The TPR mechanism is further distinguished because it provides greater wealth gains to nontendering and smaller gains to exiting shareholders. The dutch auction mechanism has an efficiency advantage over the TPR because it can be designed to eliminate the possibility of under-subscription and, furthermore, is also a more effective takeover deterrent.

Date: 1991
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