Insider signaling and insider trading with repurchase tender offers

Cash distributed to public shareholders is distributed through three mechan isms: dividends, open market repurchases (OMRs), and repurchase lender offe rs (RTOs). The leading explanation for why a corporation would distribute c ash through an RTO rather than an OMR or a dividend is the "signaling theor y" - that managers use RTOs to signal that the stock is underpriced The Article has three main purposes: (1) to challenge the signaling theory, by exposing a flaw in one of its key assumptions and presenting empirical data suggesting that the theory cannot account for most RTOs; (2) to show t hat the same empirical data are consistent with insiders using RTOs to enga ge in insider trading with public shareholders; and (3) to propose that ins iders be (a) required to disclose their tendering decision before the close of the RTO and (b) forbidden from selling stock outside of the RTO until s ix months after the announcement date. The Article explains how this "discl ose/delay" rule would substantially reduce insiders' ability to use RTOs fo r insider trading, without interfering with the use of RTOs for any other p urpose (including signaling).