Share Buybacks, Monetary Policy and the Cost of Debt

47 Pages Posted: 8 Jul 2020

See all articles by Assia Elgouacem

Assia Elgouacem

Sciences Po - Department of Economics

Riccardo Zago

Banque de France

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

Share buybacks have become common practice across U.S corporations. This paper shows that firms finance these operations mostly through newly issued corporate bonds, and that the exogenous variation in the cost of debt -due to innovations in monetary policy- is key in explaining managers' incentives to repurchase their own shares. Under our identification strategy, we find that firms are more likely to repurchase in periods of accommodative monetary policy when the yield on bond adjusts in the same direction. This behavior has macroeconomic implications as it diverts resources from investment and employment, thus reducing the transmission of accommodative monetary policy at firm-level.

Keywords: Share Buybacks, Monetary Policy, Corporate Yield, EPS Targeting.

JEL Classification: E52, G11, G35, G32

Suggested Citation

Elgouacem, Assia and Zago, Riccardo, Share Buybacks, Monetary Policy and the Cost of Debt (July 2020). Banque de France Working Paper No. 773, Available at SSRN: https://ssrn.com/abstract=3644859 or http://dx.doi.org/10.2139/ssrn.3644859

Assia Elgouacem

Sciences Po - Department of Economics ( email )

28, rue des Saints peres
Paris, 75007
France

Riccardo Zago (Contact Author)

Banque de France ( email )

Paris
France

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