Insider Trading after Repurchase Tender Offer Announcements: Timing versus Informed Trading

Abnormally high net insider selling is commonly observed after repurchase tender offer (RTO) announcements although, on average, firms experience positive abnormal returns in the years after the repurchases. We explore two potential explanations: liquidity trade timing and informed trading. Consistent with the notion that fixed price RTOs are more likely than Dutch-auction RTOs to signal undervaluation, the results suggest that insider selling after fixed price RTO announcements are driven largely by insiders who time their trades with the repurchase announcements. In contrast, selling after Dutch-auction RTOs seems to be driven primarily by informed traders who exploit mispricing associated with the repurchase announcements.