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Capital structure, equity mispricing, and stock repurchases

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  • Bonaimé, Alice Adams
  • Öztekin, Özde
  • Warr, Richard S.
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    Abstract

    We evaluate motives for share repurchases using a unified framework where a firm has a target capital structure and has equity that can be mispriced. We document that capital structure adjustments are a value-increasing motive for repurchases and that the extent to which adjusting capital structure through a repurchase creates value depends on the undervaluation of the firm. Underlevered and undervalued firms enjoy the greatest economic gains from a repurchase, as evidenced by the stock price reaction to the repurchase announcement, and these firms are more likely to announce a share repurchase program.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 26 (2014)
    Issue (Month): C ()
    Pages: 182-200

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    Handle: RePEc:eee:corfin:v:26:y:2014:i:c:p:182-200

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Target leverage; Residual income model; Capital structure; Equity mispricing; Market timing; Share repurchase;

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