Laurie Simon Hodrick

Does Stock Price Elasticity Affect Corporate Financial Decisions?

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Abstract:
This paper considers whether stock price elasticity affects corporate financial decisions. Basic economic principles and the existing theoretical literature predict that firms choosing the Dutch auction instead of the fixed price tender offer should be those firms expecting to face greater stock price elasticity. Econometric analysis suggests that firms choosing the Dutch auction instead of the fixed price tender offer between 1984 and 1989 are indeed those firms expecting to face greater stock elasticity, even though the average realized elasticities of the firms conducting the various tender offers fail to be significantly different. The expected elasticity remains an important determinant of the tender offer choice even when allowing for firm characteristics associated with the choice of repurchase method. Firms facing greater elasticity are also characterized. The findings suggest that expected stock price elasticity may be an important determinant of corporate the financial decisions that affect the supply of, or demand for, stock.

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