Do the Sources of Funds Used in Stock Repurchase Matter? A Credit Risk Perspective

Liao, Hsien-Hsing; Chen, Tsung-Kang; Chang, Chin-Chun

doi:10.2139/ssrn.1362443

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Do the Sources of Funds Used in Stock Repurchase Matter? A Credit Risk Perspective

51 Pages Posted: 18 Mar 2009

See all articles by Hsien-Hsing Liao

Chin-Chun Chang

affiliation not provided to SSRN

There are 2 versions of this paper

Date Written: January 12, 2009

Abstract

This study develops a credit risk innovation proxy to revisit the signaling and wealth transfer effects around stock repurchase announcements. Using U.S. data from 1991 to 2006, empirical results support the co-existence of wealth transfer and signaling effects when a firm repurchases stocks, and find that positive signaling effects dominate wealth transfer effects. The aggregate effects of stock repurchases benefit debt holders and are positively related to the size of a repurchase. Debt-funded repurchases exhibit greater positive signal effects, while the effects are abated by higher default probabilities due to a rise in debt level.

Keywords: Stock repurchase, Signaling effect, Wealth transfer effect, Credit risk

JEL Classification: G30, G32, G35

Suggested Citation: Suggested Citation

Liao, Hsien-Hsing and Chen, Tsung-Kang and Chang, Chin-Chun, Do the Sources of Funds Used in Stock Repurchase Matter? A Credit Risk Perspective (January 12, 2009). Available at SSRN: https://ssrn.com/abstract=1362443 or http://dx.doi.org/10.2139/ssrn.1362443