Capital Structure, Equity Mispricing, and Stock Repurchases
54 Pages Posted: 3 Aug 2013 Last revised: 27 Mar 2014
Date Written: March 2014
We evaluate motives for share repurchases using a unified framework where a firm has a target capital structure and has equity that can be mispriced. We document that capital structure adjustments are a value-increasing motive for repurchases and that the extent to which adjusting capital structure through a repurchase creates value depends on the undervaluation of the firm. Underlevered and undervalued firms enjoy the greatest economic gains from a repurchase, as evidenced by the stock price reaction to the repurchase announcement, and these firms are more likely to announce a share repurchase program.
Keywords: Target Leverage, Residual Income Model, Capital Structure, Equity Mispricing, Market Timing, Share Repurchase
JEL Classification: G30, G32, G35
Suggested Citation: Suggested Citation