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Capital structure, equity mispricing, and stock repurchases

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

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.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:corfin:v:26:y:2014:i:c:p:182-200
    DOI: 10.1016/j.jcorpfin.2014.03.007
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    More about this item

    Keywords

    Target leverage; Residual income model; Capital structure; Equity mispricing; Market timing; Share repurchase;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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