The Journal of finance target shares. These theories imply that repurchase tender offers can increase real cash flows as opposed to the perceived cash flows of the signalling hypothesis While this paper sheds some light on the changing motivation behind buybacks we are mainly concerned with the implications for investment management: is it possible to make abnormal returns by trading around repurchase tender offers? There are two reasons why buybacks provide an interesting setting in which to examine market efficiency; these reasons correspond to the two types of trading strategies we test. First, a repurchase tender offer creates substantial price uncertainty and therefore more opportunities for potential mispricing. In order to price securities properly during the tender offer period, investors have te estimate 1)the fraction of shares tendered, 2)the subsequent repurchase decisions by the management, and 3)the market price after the expiration of the offer. Hence, the first trading rule tests for profit opportunities during the offer period Specifically, we test whether it is possible to make abnormal returns by buying shares before the expiration date and then tendering those shares to the company. This trading rule mimics the behavior of risk arbitrageurs who typically buy and tender during the offer period. For example, Weinstein(1984), a money manager, states that the investor must keep accurate statistics of the daily trading volume from the time of the announcement of the self-tender until the early pro rata date or registration date of the offer as an indication of how many shares are likely to be tendered. Most of the stock will have been bought by arbitrageurs Larcker and Lys(1987) conclude that risk arbitrageurs earn substantial returns n their trading activities around mergers, intra- firm tender offers, and voluntary liquidations. They argue that risk arbitrageurs are able to generate private information regarding the success of corporate reorganizations. Alternatively one could argue that these excess returns are fair compensation for the services that arbitrageurs provide in takeover bids(Jensen(1986b). Arbitrageurs 1)help to evaluate alternative offers, 2)provide risk-bearing services for investors who would rather sell than bear the uncertainty surrounding the offer, and 3)resolve the free-rider problems of small, diffuse target shareholders who cannot organize to negotiate directly with the bidder. In the case of repurchase tender offers mainly the second service is relevant The second reason for examining market efficiency follows from the result presented in previous studies. Vermaelen(1981)reports that, on average, tend- ering shareholders receive a premium of 23 percent, while nontendering share olders obtain a rate of return of only 13 percent. The nontendering group includes the management of the company which implies that insiders apparently give away"part of the firm to outsiders The increase in the bid price decreases the probability of a successful bic egative impact on firm value. Hence, according to Stulz, the repurchase might increase or decrease rm value, depending on which effect is more important. If managerial holdings are typical in larger firms, the bid price effect might dominate 2 See Weinstein(1984), p 5 At least part of the abnormal return can probably be attributed to illegal insider trading activity