The Wealth Effects of Repurchases on Bondholders


  • William F. Maxwell,

  • Clifford P. Stephens

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    • Maxwell is with the Eller College of Business and Public Administration, University of Arizona. Stephens is with E. J. Ourso College of Business, Louisiana State University. We thank Phil English, Martin Fridson, Rick Green (the editor), Ro Gutierrez, Scott Hein, Dave Mauer, Shirley Peterson, Jeff Pontiff, Mark Shenkman, Doug Witte, and a particularly helpful anonymous referee, as well as seminar participants at the University of Kansas and the University of Missouri for their constructive comments. All remaining errors are ours.


Prior research has documented positive abnormal stock returns around the announcements of repurchase programs; several explanations of these returns have been suggested, including signaling, free cash flow, and wealth redistributions. This study analyzes abnormal stock, bond, and firm returns around repurchase announcements to examine these hypotheses. We find evidence consistent with both signaling and wealth redistribution. The loss to bondholders is a function of the size of the repurchase, and the risk of the firm's debt. We also find that bond ratings are twice as likely to be downgraded as upgraded after the announcement of the repurchase program.