Do Firms Undertake Self-Tender Offers to Optimize Capital Structure?*

Companies occasionally announce that they undertake self-tender offers to optimize their capital structure. For example, in January 1997, James M. Usdan, president and chief executive officer of RehabCare Group, stated that “the use of cash and borrowing to fund the tender offer will result in a more efficient capital structure for the company” (Business Wire, January 31, 1997). Further, the announcement of Insilco Corporation’s selftender offer in July 1997 stated that the company “expects the share repurchase to enhance shareholder value by . . . giving the company a capital structure in which the company’s average after-tax cost of capital is reduced” (Newswire, July 11, 1997). Previous empirical studies report a stock price reaction of 8%–18% to self-tender offer announcements (Masulis 1980; Dann 1981; Vermaelen 1981; Comment and Jarrell 1991). Further, Dann, Masulis, and Mayers (1991), Hertzel and Jain (1991), Lie and McConnell (1998), and Nohel and Tarhan (1998) document increases in future earnings. Consequently, selftender offers are typically perceived as signaling insider information about firms’ earnings prospects. Less attention has been focused on the notion that