The Wealth Effects of Repurchases on Bondholders

Posted: 3 Sep 2003

See all articles by William F. Maxwell

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Clifford P. Stephens

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Abstract

Prior research has documented positive abnormal stock returns around the announcements of repurchase programs; several explanations of these returns have been suggested, including signaling, free cash flow, and wealth redistributions. This study analyzes abnormal stock, bond, and firm returns around repurchase announcements to examine these hypotheses. We find evidence consistent with both signaling and wealth redistribution. The loss to bondholders is a function of the size of the repurchase, and the risk of the firm's debt. We also find that bond ratings are twice as likely to be downgraded as upgraded after the announcement of the repurchase program.

Suggested Citation

Maxwell, William F. and Stephens, Clifford P., The Wealth Effects of Repurchases on Bondholders. Available at SSRN: https://ssrn.com/abstract=416669

William F. Maxwell (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States

Clifford P. Stephens

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Department of Finance
2159 CEBA
Baton Rouge, LA 70803-6308
United States
225-578-6334 (Phone)

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