BOND MARKET REACTION TO STOCK REPURCHASES: IS THERE A WEALTH TRANSFER EFFECT?

Authors


  • The authors are extremely grateful for the encouragement of the editor (Jayant Kale) and for the detailed constructive comments and suggestions of the referee (Murali Jagannathan). The authors thank Ronald Bremer, William P. Dukes, Philip English, and 2005 Financial Management Association conference participants for helpful comments. The authors also thank Subbu Iyer and Han Zhang for their valuable research assistance.

Abstract

We reexamine the bondholder wealth impact of stock repurchases with a focus on the wealth transfer effect. We do not detect any transfer of wealth from bondholders to shareholders surrounding open market stock repurchases. For the overall sample (1994–2002), using daily data we document a significant decrease in bond yields surrounding repurchase announcements. Subsamples classified by attributes that capture wealth transfer propensity also do not reveal evidence consistent with a wealth transfer effect. Correlation analysis between bond and stockholder wealth effects similarly is not supportive of a wealth transfer effect. Contrary to the wealth transfer hypothesis, we document a greater proportion of bond rating upgrades than downgrades in the three months following a repurchase announcement. Our results are robust to alternate bond price data and event return methodology.

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