Do the Sources of Funds used in Stock Repurchase Matter? A Credit Risk Perspective

51 Pages Posted: 22 Aug 2008 Last revised: 18 Mar 2009

See all articles by Hsien-Hsing Liao

Hsien-Hsing Liao

National Taiwan University

Chin-Chun Chang

affiliation not provided to SSRN

Tsung-Kang Chen

National Chiao Tung University

Multiple version iconThere are 2 versions of this paper

Date Written: June 22, 2008

Abstract

This study develops a credit risk innovation proxy to revisit the signaling and wealth transfer effects around stock repurchase announcements. Using U.S. data from 1991 to 2006, empirical results support the co-existence of wealth transfer and signaling effects when a firm repurchases stocks, and finds that positive signaling effects dominate wealth transfer effects. The aggregate effects of stock repurchases benefit debt holders and are positively related to the size of a repurchase. Debt-funded repurchases exhibit greater positive signal effects, while the effects are abated by higher default probabilities due to a rise in debt level.

Keywords: Stock repurchase, Signaling effect, Wealth transfer effect, Credit risk

JEL Classification: G30, G32, G35

Suggested Citation

Liao, Hsien-Hsing and Chang, Chin-Chun and Chen, Tsung-Kang, Do the Sources of Funds used in Stock Repurchase Matter? A Credit Risk Perspective (June 22, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1246140 or http://dx.doi.org/10.2139/ssrn.1246140

Hsien-Hsing Liao (Contact Author)

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Chin-Chun Chang

affiliation not provided to SSRN ( email )

Tsung-Kang Chen

National Chiao Tung University ( email )

No. 1001, Dasyue Rd., East Dist.,
Hsinchu City, 300
Taiwan

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