Bond market reaction to stock repurchases: is there a wealth transfer effect?

Bond market reaction to stock repurchases: is there a wealth transfer effect?

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Article ID: iaor201112342
Volume: 34
Issue: 3
Start Page Number: 503
End Page Number: 522
Publication Date: Sep 2011
Journal: Journal of Financial Research
Authors: , ,
Keywords: stock market
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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