IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v39y2016icp242-262.html
   My bibliography  Save this article

Leveraged buybacks

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119916300505
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2016.04.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79, March.
    2. Lemmon, Michael L. & Zender, Jaime F., 2010. "Debt Capacity and Tests of Capital Structure Theories," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(5), pages 1161-1187, October.
    3. Skinner, Douglas J., 2008. "The evolving relation between earnings, dividends, and stock repurchases," Journal of Financial Economics, Elsevier, vol. 87(3), pages 582-609, March.
    4. Fama, Eugene F & French, Kenneth R, 2000. "Forecasting Profitability and Earnings," The Journal of Business, University of Chicago Press, vol. 73(2), pages 161-175, April.
    5. Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, vol. 53(1), pages 313-333, February.
    6. Martynova, Marina & Renneboog, Luc, 2009. "What determines the financing decision in corporate takeovers: Cost of capital, agency problems, or the means of payment?," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 290-315, June.
    7. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    8. Chan, Konan & Ikenberry, David L. & Lee, Inmoo & Wang, Yanzhi, 2010. "Share repurchases as a potential tool to mislead investors," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 137-158, April.
    9. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
    10. Massa, Massimo & Rehman, Zahid & Vermaelen, Theo, 2007. "Mimicking repurchases," Journal of Financial Economics, Elsevier, vol. 84(3), pages 624-666, June.
    11. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    12. Matthew T. Billett & Hui Xue, 2007. "The Takeover Deterrent Effect of Open Market Share Repurchases," Journal of Finance, American Finance Association, vol. 62(4), pages 1827-1850, August.
    13. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    14. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    15. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    16. Dittmar, Amy K. & Dittmar, Robert F., 2008. "The timing of financing decisions: An examination of the correlation in financing waves," Journal of Financial Economics, Elsevier, vol. 90(1), pages 59-83, October.
    17. Millon-Cornett, Marcia H & Travlos, Nickolaos G, 1989. " Information Effects Associated with Debt-for-Equity and Equity-for-Debt Exchange Offers," Journal of Finance, American Finance Association, vol. 44(2), pages 451-468, June.
    18. Banyi, Monica L. & Dyl, Edward A. & Kahle, Kathleen M., 2008. "Errors in estimating share repurchases," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 460-474, September.
    19. William F. Maxwell & Clifford P. Stephens, 2003. "The Wealth Effects of Repurchases on Bondholders," Journal of Finance, American Finance Association, vol. 58(2), pages 895-920, April.
    20. Rhodes-Kropf, Matthew & Robinson, David T. & Viswanathan, S., 2005. "Valuation waves and merger activity: The empirical evidence," Journal of Financial Economics, Elsevier, vol. 77(3), pages 561-603, September.
    21. William F. Maxwell & Clifford P. Stephens, 2003. "The Wealth Effects of Repurchases on Bondholders," Journal of Finance, American Finance Association, vol. 58(2), pages 895-919, April.
    22. Gustavo Grullon & Roni Michaely, 2004. "The Information Content of Share Repurchase Programs," Journal of Finance, American Finance Association, vol. 59(2), pages 651-680, April.
    23. Chen, Sheng-Syan & Wang, Yanzhi, 2012. "Financial constraints and share repurchases," Journal of Financial Economics, Elsevier, vol. 105(2), pages 311-331.
    24. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    25. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    26. Guojin Gong & Henock Louis & Amy X. Sun, 2008. "Earnings Management and Firm Performance Following Open‐Market Repurchases," Journal of Finance, American Finance Association, vol. 63(2), pages 947-986, April.
    27. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208.
    28. Faulkender, Michael & Flannery, Mark J. & Hankins, Kristine Watson & Smith, Jason M., 2012. "Cash flows and leverage adjustments," Journal of Financial Economics, Elsevier, vol. 103(3), pages 632-646.
    29. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    30. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
    31. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    32. Urs Peyer, 2009. "The Nature and Persistence of Buyback Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1693-1745, April.
    33. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    34. Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September.
    35. K. J. Martijn Cremers & Vinay B. Nair & Kose John, 2009. "Takeovers and the Cross-Section of Returns," The Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1409-1445, April.
    36. Schlingemann, Frederik P., 2004. "Financing decisions and bidder gains," Journal of Corporate Finance, Elsevier, vol. 10(5), pages 683-701, November.
    37. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    38. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    39. Laurie Simon Bagwell, 1991. "Share Repurchase and Takeover Deterrence," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 72-88, Spring.
    40. Bonaimé, Alice Adams & Öztekin, Özde & Warr, Richard S., 2014. "Capital structure, equity mispricing, and stock repurchases," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 182-200.
    41. Vermaelen, Theo, 1981. "Common stock repurchases and market signalling : An empirical study," Journal of Financial Economics, Elsevier, vol. 9(2), pages 139-183, June.
    42. Bonaimé, Alice Adams, 2012. "Repurchases, Reputation, and Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(2), pages 469-491, April.
    43. Lie, Erik, 2005. "Operating performance following open market share repurchase announcements," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 411-436, September.
    44. Lin, Ji-Chai & Stephens, Clifford P. & Wu, YiLin, 2014. "Limited attention, share repurchases, and takeover risk," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 283-301.
    45. Bradley, Michael & Wakeman, L. Macdonald, 1983. "The wealth effects of targeted share repurchases," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 301-328, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Huang, Chia-Wei, 2015. "Takeover vulnerability and the credibility of signaling: The case of open-market share repurchases," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 405-417.
    2. Chen, Sheng-Syan & Wang, Yanzhi, 2012. "Financial constraints and share repurchases," Journal of Financial Economics, Elsevier, vol. 105(2), pages 311-331.
    3. Adra, Samer & Gao, Yang & Huang, Jin & Yuan, Jiayi, 2023. "Geopolitical risk and corporate payout policy," International Review of Financial Analysis, Elsevier, vol. 87(C).
    4. Gerald J. Lobo & Ashok Robin & Kean Wu, 2020. "Share repurchases and accounting conservatism," Review of Quantitative Finance and Accounting, Springer, vol. 54(2), pages 699-733, February.
    5. Lin, Ji-Chai & Stephens, Clifford P. & Wu, YiLin, 2014. "Limited attention, share repurchases, and takeover risk," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 283-301.
    6. Bonaimé, Alice Adams & Öztekin, Özde & Warr, Richard S., 2014. "Capital structure, equity mispricing, and stock repurchases," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 182-200.
    7. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    8. Mark Mietzner, 2017. "Why do firms decide to stop their share repurchase programs?," Review of Managerial Science, Springer, vol. 11(4), pages 815-855, October.
    9. Vermaelen, Theo & Xu, Moqi, 2014. "Acquisition finance and market timing," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 73-91.
    10. Caton, Gary L. & Goh, Jeremy & Lee, Yen Teik & Linn, Scott C., 2016. "Governance and post-repurchase performance," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 155-173.
    11. Amy Dittmar, 2008. "Corporate Cash Policy and How to Manage it with Stock Repurchases," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(3), pages 22-34, June.
    12. Andreou, Panayiotis C. & Cooper, Ilan & de Olalla Lopez, Ignacio Garcia & Louca, Christodoulos, 2018. "Managerial overconfidence and the buyback anomaly," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 142-156.
    13. Alquhaif, Abdulsalam & Al-Gamrh, Bakr & Abdul Latif, Rohaida, 2020. "An overview of share buybacks: A descriptive case from Malaysia," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    14. Li, Lingxiang, 2016. "New findings on repurchase anomaly — The first-month effect," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 331-349.
    15. Yuan‐Teng Hsu & Chia‐Wei Huang, 2020. "Why do stock repurchases change over time?," European Financial Management, European Financial Management Association, vol. 26(4), pages 938-957, September.
    16. Ota, Koji & Lau, David & Kawase, Hironori, 2022. "Signal strength adjustment behavior: Evidence from share repurchases," Journal of Banking & Finance, Elsevier, vol. 143(C).
    17. Wilson X. B. Li & Tina T. He & Andrew Marshall & Gordon Y. N. Tang, 2020. "An empirical analysis of accounting conservatism surrounding share repurchases," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(4), pages 609-627, December.
    18. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.
    19. Haw, In-Mu & Ho, Simon S.M. & Hu, Bingbing & Zhang, Xu, 2011. "The contribution of stock repurchases to the value of the firm and cash holdings around the world," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 152-166, February.
    20. Tao-Hsien Dolly King & Charles E. Teague, 2022. "Accelerated share repurchases: value creation or extraction," Review of Quantitative Finance and Accounting, Springer, vol. 58(1), pages 171-216, January.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:39:y:2016:i:c:p:242-262. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.