Wealth Transfers via Equity Transactions

53 Pages Posted: 17 Feb 2013 Last revised: 18 Feb 2015

See all articles by Richard G. Sloan

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: August 4, 2014

Abstract

Previous research indicates that firms issue shares when their stock is overpriced and repurchase shares when their stock is underpriced. Such transactions transfer wealth from transacting stockholders to ongoing stockholders. We quantify the magnitude of these wealth transfers and analyze their implications. Strikingly, we find that for the average firm-year, these wealth transfers approximate 40% of net income. We also find that these wealth transfers can be predicted using a variety of firm characteristics and that future wealth transfers are an important determinant of current stock prices.

Keywords: Equity issue, equity repurchase, wealth transfer, mispricing, valuation

JEL Classification: G14, G32, G34, G35

Suggested Citation

Sloan, Richard G. and You, Haifeng, Wealth Transfers via Equity Transactions (August 4, 2014). Available at SSRN: https://ssrn.com/abstract=2218986 or http://dx.doi.org/10.2139/ssrn.2218986

Richard G. Sloan (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

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