Dutch auctions are used to effect the capital structure changes more often than fixed-price tender offers by a five-to-two margin.
When the source of the cash is cited, Dutch auctions are the predorninate form of repurchase.
Persons, J., 1994, "Signaling and Takeover Deterrence with Stock Repurchases: Dutch Auctions versus Fixed Price Tender Offers," Journal of Finance 49, 1373-1402.
Similar problems may occur with reverse Dutch auctions used to buy troubled assets.
Reverse Dutch auctions may therefore be vulnerable to adverse selection, meaning that the average credit quality of submitted assets of a given type may be systematically worse than the average credit quality of all assets of that type.
Moreover, managing a portfolio bought via reverse Dutch auctions susceptible to adverse selection could present financial risks to the federal government.
By broadening the pool of potential investors, Dutch auctions reduce the likelihood of a deal being an investor's bargain.
Interestingly, some companies using Dutch auctions under-price their clearing price on purpose to give investors a chance for a pop, albeit a more modest one.
The financial advantages of Dutch auctions to companies, based on the more accurate pricing touted by many proponents of the method, may also be overstated.
Some companies choose to integrate the Dutch auction into an overall repurchase plan.
For companies that want to elevate stock prices to keep them competitive, repurchase programs make for sensible solutions, and the Dutch auction is a good way to do it quickly.
While the returns of firms conducting fixed-price offers are more negative than for firms conducting Dutch auctions, the difference is not statistically significant.
In summary, the results show no evidence of overpayment in fixed-price offers compared to Dutch auctions. Differences in premiums observed in past studies are explained by the influence of firm size and the proportion of shares sought.
Although we expect to find informed selling after Dutch auction tender offers, we have no such expectation for fixed price tender offers.
Firms engaging in fixed price tender offers tend to be larger, with an average market value (SIZE) of $1,172 million as compared to an average of $810 million for firms engaging in Dutch auction tender offers.