Key points are not available for this paper at this time.
We develop a model in which stock repurchases serve as a defense against takeovers by signaling the manager’s private information about the value of the firm. The manager repurchases shares to block a takeover only if the cost of doing so is not too high. Since the cost is inversely related to the value of the firm under his management, a repurchase signals that the value of the stock is high, blocking a takeover. While a repurchase increases the expected value of the stock, it also makes the stock riskier. The model also implies that there are too few takeovers for efficiency.
Bagnoli et al. (Sat,) studied this question.