Levered Repurchases: Who benefits?
Prior research has documented several explanations of repurchase behavior, and the resultant market reaction, including signaling, free cash flow, and wealth redistribution hypotheses. This paper examines how the financing used to repurchase shares reflects the motivation behind share repurchases, and the resultant stock market and bond market reaction to the repurchase announcement. We segment our sample on cash financed repurchases (unlevered repurchases) and debt financed repurchases (levered repurchases), and find evidence in support the above hypotheses. Firms that are cash rich are unlikely to use debt to fund the repurchase. These cash financed repurchases result in a positive market reaction. Firms tend to use debt financed repurchases when they are cash poor, and have excess debt capacity. These levered repurchases may signal undervaluation to the market, and result in positive stock and bond abnormal returns. However, if the levered repurchase firm already has higher than optimal debt levels, the costs associated with the increased default risk outweigh the benefits, leading to negative stock and bondholder returns. We also find that levered repurchases have five times as many downgrades in credit rating compared to unlevered repurchases, consistent with the wealth transfer hypothesis. However, we do observe that seven percent of the levered repurchases actually experience an increase in credit ratings, which is consistent with the signaling hypothesis.
Kristina Minnick Mengxin Zhao
Department of Finance Bentley College
国际会议
成都
英文
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）