Abstract

This study employs conditional event study methodology to analyze how managers’ personal motives affect the method by which firms repurchase their shares. To address this question, we examine insider trading activities around the announcement date of a stock repurchase. We find that firms are more likely to choose tender offers rather than an open market repurchases when the respective announcements are followed by heightened net insider sales. The results are most significant in the two months subsequent to the announcement. Our findings remain robust when examining the relationship between net insiders sales and stock repurchase methods in a sample that includes matched firms. We do not find any significant correlation between pre-announcement insider trading and the type of repurchase method a firm employs. Similarly, there are no differences between the long-term accounting or stock price returns of our sample firms when comparing the two repurchase methods. Our findings support Fried (2000) who proposes that tender offer repurchases are used by insiders to directly or indirectly transfer value among shareholders with insiders emerging ahead of the average public shareholder. As such, they should be of interest to investors and policymakers involved in the regulation of insider financial transactions.