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Capital Structure, Equity Mispricing, and Stock Repurchases

54 Pages Posted: 3 Aug 2013 Last revised: 27 Mar 2014

Alice A. Bonaime

University of Arizona

Özde Öztekin

Florida International University (FIU)

Richard S. Warr

North Carolina State University

Date Written: March 2014

Abstract

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

Bonaime, Alice A. and Öztekin, Özde and Warr, Richard S., Capital Structure, Equity Mispricing, and Stock Repurchases (March 2014). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2305271 or http://dx.doi.org/10.2139/ssrn.2305271

Alice A. Bonaime

University of Arizona ( email )

Eller College of Management
Department of Finance
Tucson, AZ 85721
United States

Özde Öztekin (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Richard S. Warr

North Carolina State University ( email )

BOX 7229
Raleigh, NC 27695-7229
United States
919-513-4646 (Phone)
919-515-6943 (Fax)

HOME PAGE: http://www4.ncsu.edu/~rswarr/

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