Leveraged Buybacks

50 Pages Posted: 28 Nov 2014 Last revised: 21 Feb 2017

See all articles by Zicheng Lei

Zicheng Lei

University of Surrey - Finance and Accounting Group

Chendi Zhang

University of Warwick - Finance Group

Date Written: April 19, 2016

Abstract

Debt-financed share buybacks generate positive short-term and long-run abnormal stock returns. Leveraged buyback firms have more debt capacity, higher marginal tax rate, lower excess cash and lower growth prospects ex ante, increase leverage and reduce investments more sharply ex post than cash-financed buyback firms. Firms that are over-levered ex-ante are associated with lower returns and real investments following leveraged buybacks. The lower announcement returns of over-levered firms are concentrated on firms with weaker corporate governance. The evidence is consistent with leveraged buybacks enabling firms to optimize their leverage, on average benefiting shareholders. The benefits decrease with a firm’s leverage ex ante.

Keywords: Share Repurchases, Leverage Adjustments, Debt-for-Equity Swap, Sources of Financing

JEL Classification: G32, G33, G35

Suggested Citation

Lei, Zicheng and Zhang, Chendi, Leveraged Buybacks (April 19, 2016). Journal of Corporate Finance, Vol. 39, No. 242-262, 2016. Available at SSRN: https://ssrn.com/abstract=2528478 or http://dx.doi.org/10.2139/ssrn.2528478

Zicheng Lei

University of Surrey - Finance and Accounting Group ( email )

63MS02, Rik Medlik Building
Surrey Business School
Guildford, Surrey GU2 7XH
United Kingdom
01483686372 (Phone)

Chendi Zhang (Contact Author)

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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