Share Repurchase, Executive Options and Wealth Changes to Stockholders and Bondholders

44 Pages Posted: 21 Mar 2006 Last revised: 22 Jul 2008

See all articles by Sang-Gyung Jun

Sang-Gyung Jun

Hanyang University

Mookwon Jung

Kookmin University

Ralph A. Walkling

Drexel University - Lebow College of Business

Date Written: September 16, 2006


We test the signaling and wealth transfer hypotheses around the announcement of share repurchases using a recent and larger sample of data than previously examined while employing a methodology designed to enhance the power of our tests. Disentangling the wealth transfer and signaling hypotheses is difficult; they are not mutually exclusive and can have opposite effects for bondholders. Wealth transfers will decrease bondholder wealth while positive signals will increase it; the combined effects obscure tests of each hypothesis. By focusing on sub-samples where signaling is more and less likely to be present we increase our ability to isolate the separate effects. In addition to traditional tests of wealth effects, we feature information inherent in the relation of wealth changes to equity and debt. Also, it is important to examine more recent evidence surrounding repurchases, particularly for bondholders. Most work on wealth changes to bondholders ends in 1997 with the demise with the Lehman Brothers Bond Database. Our results are generally consistent with the positive signaling effect of stock repurchases, but also provide some support for wealth transfer. Our work also emphasizes the importance of trying to disentangle the various hypotheses. In the subset of option funding repurchases, where signaling effects are less likely, the positive correlation of wealth changes between stockholders and bondholders is completely eliminated. Bond ratings are much more likely to be upgraded in samples without executive options which is precisely where the signaling effects are expected to be concentrated. Governance factors are insignificant.

Keywords: Repurchase, wealth transfer, signaling

JEL Classification: G32, G34, G35

Suggested Citation

Jun, Sang-Gyung and Jung, Mookwon and Walkling, Ralph August, Share Repurchase, Executive Options and Wealth Changes to Stockholders and Bondholders (September 16, 2006). Available at SSRN: or

Sang-Gyung Jun

Hanyang University ( email )

Korea, Republic of (South Korea)

Mookwon Jung

Kookmin University ( email )

Korea, Republic of (South Korea)

Ralph August Walkling (Contact Author)

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

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