Stock Repurchase as a Takeover Defense
- 1 July 1989
- journal article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 2 (3) , 423-443
- https://doi.org/10.1093/rfs/2.3.423
Abstract
We develop a model in which stock repurchases serve as a defense against takeovers by signaling the manager's private information about the value of the firm. The manager repurchases shares to block a takeover only if the cost of doing so is not too high. Since the cost is inversely related to the value of the firm under his management, a repurchase signals that the value of the stock is high, blocking a takeover. While a repurchase increases the expected value of the stock, it also makes to stock riskier. The model also implies that there are too few takeovers for efficiency.Keywords
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