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The Construction of Tender Offers: Capital Gains Taxes and the Free Rider Problem

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  • Brown, David T

Abstract

Shareholders are less likely to tender shares in the first stage of a two-tier offer than in an any-or-all offer. This is inconsistent with the view that two-tier offers overcome the free-rider problem. This article shows that two-tier offers with a fully taxable first stage and a nontaxable second stage are structured to induce shareholders with low capital-gains tax liabilities to accept the first stage and shareholders with high capital-gains tax liabilities to accept the second stage. In offers where both the first- and second -stage compensations are taxable, high tendering rates occur in the first stage. Copyright 1988 by the University of Chicago.

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  • Brown, David T, 1988. "The Construction of Tender Offers: Capital Gains Taxes and the Free Rider Problem," The Journal of Business, University of Chicago Press, vol. 61(2), pages 183-196, April.
    • Handle: RePEc:ucp:jnlbus:v:61:y:1988:i:2:p:183-96
    DOI: 10.1086/296427
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    Cited by:

    1. Christine Brown, 2007. "The Announcement Effects of Off-Market Share Repurchases in Australia," Australian Journal of Management, Australian School of Business, vol. 32(2), pages 369-385, December.
    2. Persons, John C., 1997. "Heterogeneous shareholders and signaling with share repurchases," Journal of Corporate Finance, Elsevier, vol. 3(3), pages 221-249, June.
    3. Christine Brown & Katrina Efthim, 2005. "Effect of Taxation on Equal Access Share Buybacks in Australia," International Review of Finance, International Review of Finance Ltd., vol. 5(3‐4), pages 199-218, September.

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