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Leveraged buybacks

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  • Lei, Zicheng
  • Zhang, Chendi

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.

Suggested Citation

  • Lei, Zicheng & Zhang, Chendi, 2016. "Leveraged buybacks," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 242-262.
    • Handle: RePEc:eee:corfin:v:39:y:2016:i:c:p:242-262
    DOI: 10.1016/j.jcorpfin.2016.04.004
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    More about this item

    Keywords

    Share repurchases; Leverage adjustments; Debt-for-equity swap; Sources of financing;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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