Bond Repurchase Objectives and the Repurchase Method Choice

50 Pages Posted: 25 Jul 2011 Last revised: 28 May 2016

See all articles by Hagit Levy

Hagit Levy

City University of New York (CUNY) - Stan Ross Department of Accountancy

Ron Shalev

University of Toronto - Rotman School of Management

Date Written: May 27, 2016

Abstract

This study investigates how the firm’s objective of the bond repurchase affects its choice of whether to repurchase on the open market or via a tender offer. Unlike tender offers, open market repurchases are not pre-announced and the identity of the buyer is unknown to the seller. We provide evidence that firms are likely to repurchase on the open market when they seek to exploit mispricing of their bonds and when they seek to manage their financial reports, either in order to meet earnings targets or avert debt covenant violations. When firms seek to amend indenture terms they are likely to choose a tender offer over an open market repurchase. We also find that mispricing exploitation is mitigated when the information quality available to bondholders is higher and that insiders take advantage of the likely wealth transfer from bondholders to shareholders achieved in open market repurchases.

Keywords: Bond repurchase, open-market repurchase, bond mispricing, financial reports management

JEL Classification: G32

Suggested Citation

Levy, Hagit and Shalev, Ron, Bond Repurchase Objectives and the Repurchase Method Choice (May 27, 2016). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1894780 or http://dx.doi.org/10.2139/ssrn.1894780

Hagit Levy

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Ron Shalev (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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