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Share Buybacks, Monetary Policy and the Cost of Debt

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  • Assia Elgouacem

    (OECD)

  • Riccardo Zago

    (Banque de France)

Abstract

Share buybacks have become common practice across U.S. corporations. This paper shows that firms finance these operations mostly through newly issued corporate bonds, and that the exogenous variation in the cost of debt—due to innovations in monetary policy—is key in explaining managers’ incentives to repurchase their own shares. Under our identification strategy, we find that firms are more likely to repurchase in periods of accommodative monetary policy when the yield on their bonds adjusts in the same direction. This behavior has macroeconomic implications, as it diverts resources from investment and employment, thus reducing the transmission of accommodative monetary policy at firm level.

Suggested Citation

  • Assia Elgouacem & Riccardo Zago, 2023. "Share Buybacks, Monetary Policy and the Cost of Debt," International Journal of Central Banking, International Journal of Central Banking, vol. 19(2), pages 295-349, June.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:2:a:6
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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