Why Do Financially Unconstrained Firms Borrow to Repurchase Shares?

53 Pages Posted: 24 Aug 2016 Last revised: 6 Dec 2019

See all articles by Daniel Gyimah

Daniel Gyimah

University of Aberdeen

Antonios Siganos

University of Glasgow

Chris Veld

Monash University

Date Written: December 2, 2019

Abstract

We study the impact of financial constraints on cross-market arbitrage. We find that financially constrained firms are more likely to conduct debt-financed share repurchases. Such repurchases tend to reduce investments and increase financial distress risks, especially when financially constrained firms are over-leveraged. Less financially constrained firms instead tend to conduct debt-financed repurchases only when debt market conditions are favourable. Moreover, less financially constrained firms tend to issue overvalued debt to fund the repurchase of undervalued equity. These results are in line with the cross-market arbitrage hypothesis according to which firms fund repurchases during good debt market conditions even though internal funding is available.

Keywords: Levered share repurchases, financially unconstrained firms, debt market timing, equity undervaluation, investment expenditures

JEL Classification: G03, G30, G31, G32

Suggested Citation

Gyimah, Daniel and Siganos, Antonios and Veld, Chris, Why Do Financially Unconstrained Firms Borrow to Repurchase Shares? (December 2, 2019). Available at SSRN: https://ssrn.com/abstract=2828183 or http://dx.doi.org/10.2139/ssrn.2828183

Daniel Gyimah

University of Aberdeen ( email )

Dunbar Street
Aberdeen, AB24 3QY
United Kingdom

Antonios Siganos

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Chris Veld (Contact Author)

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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