Capital structure, equity mispricing, and stock repurchases

Alice Adams Bonaimé, Ozde Oztekin () and Richard S. Warr

Journal of Corporate Finance, 2014, vol. 26, issue C, 182-200

Abstract: We evaluate motives for share repurchases using a unified framework where a firm has a target capital structure and has equity that can be mispriced. We document that capital structure adjustments are a value-increasing motive for repurchases and that the extent to which adjusting capital structure through a repurchase creates value depends on the undervaluation of the firm. Underlevered and undervalued firms enjoy the greatest economic gains from a repurchase, as evidenced by the stock price reaction to the repurchase announcement, and these firms are more likely to announce a share repurchase program.

Keywords: Target leverage; Residual income model; Capital structure; Equity mispricing; Market timing; Share repurchase (search for similar items in EconPapers)
JEL-codes: G30 G32 G35 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:26:y:2014:i:c:p:182-200

DOI: 10.1016/j.jcorpfin.2014.03.007

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