The Wealth Effects of Repurchases on Bondholders

William F. Maxwell · Clifford P. Stephens

258 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Credit Risk and Financial Regulations

Abstract

ABSTRACT Prior research has documented positive abnormal stock returns around the announcements of repurchase programs; several explanations of these returns have been suggested, including signaling, free cash flow, and wealth redistributions. This study analyzes abnormal stock, bond, and firm returns around repurchase announcements to examine these hypotheses. We find evidence consistent with both signaling and wealth redistribution. The loss to bondholders is a function of the size of the repurchase, and the risk of the firm's debt. We also find that bond ratings are twice as likely to be downgraded as upgraded after the announcement of the repurchase program.

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References

1980Measuring security price performance 1995Market underreaction to open market share repurchases 2001Explaining the Rate Spread on Corporate Bonds 2002Dividends, Share Repurchases, and the Substitution Hypothesis 2000Financial flexibility and the choice between dividends and stock repurchases 1981Common stock repurchases and market signalling 1998Actual Share Reacquisitions in Open‐Market Repurchase Programs 1998The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?

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