Do the Sources of Funds Used in Stock Repurchase Matter? A Credit Risk Perspective
51 Pages Posted: 18 Mar 2009
Date Written: January 12, 2009
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 find 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: Suggested Citation