Anomalous Price Behavior Around Repurchase Tender Offers days before the repurchase announcement. On average, 16.41 percent of the shares outstanding were purchased, but a much larger fraction(87 percent)of the shares tendered was purchased by the company. apparently, many investors decided not to tender their shares. By tendering shares, investors realize capital gains which are substantial if the base price is low relative to the tender offer price. Therefore tax considerations might explain why many investors do not tender. However, tax considerations are unlikely to provide a full explanation given the widespread ownership of shares by tax-exempt institutions. We also computed the cumulative average abnormal return to the nontendering shareholders from five days before the announcement until ten days after the expiration date(CAR)and the weighted average abnormal return to the tendering and nontendering shareholders(TOTALR). On average, nontendering share- holders earn an abnormal return of 12. 54 percent, which is significantly smaller than the 21. 79 percent premium that the tendering shareholders receive. Because on average, 16.41 percent of the outstanding shares are repurchased, the repur chase announcement increases the total value of the firm by 14.29 percent (TOTALR) To test for the stability of the results, we divided the sample into two subperiods: 1)1962-1979, which approximately corresponds to the period exam ined in past research, and 2) the more recent period, 1980-1986. Table I shows that, in the second subperiod, returns to both the tendering and nontendering shareholders became smaller. We elaborate on these results later Il Trading Rules Around the Expiration Date A Methodology In a repurchase tender offer, firms offer to buy back a fraction of their shares at a tender price, Pt, before a specific date(the expiration date). The first trading rule consists of buying shares before the original expiration date and tendering to the firm. In order to compute the gains from such a strategy, it is important to keep in mind the rules governing the repurchase tender mechanism If the offer is undersubscribed (i. e, the fraction of shares tendered, FT, is less than the fraction of shares sought), the firm will repurchase all shares tendered. This is true even when the offer is extended and becomes oversubscribed later on. If the offer is oversubscribed, the firm will either buy back all the shares endered or allocate pro-rata so that each shareholder sells the fraction Fn/Frof his or her shares to the company(where Fp is the fraction purchased Thus, the profit from buying a stock at a price PB during the tender period and tendering it to the firm is equal to Pr- Pb if the offer is undersubscribed at The benchmark return used was based on the CrsP equally weighted market index. Because of the short period, the results are not sensitive to the various methods of computing abnormal returns An offer may be extended. In our sample, 99 of the 258 offers were undersubscribed at the initial expiration day: 43 were extended and 1l of these became subsequently oversubscribe g To reduce shareholder servicing costs, companies in many cases buy all the shares from the hareholders who tendered a small number of shares, typically 100 or less. However, this has a very small impact on the F/Fr ratio