Share Buybacks, Monetary Policy and the Cost of Debt

Assia Elgouacem and Riccardo Zago
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Assia Elgouacem: OECD
Riccardo Zago: Banque de France

International Journal of Central Banking, 2023, vol. 19, issue 2, 295-349

Abstract: Share buybacks have become common practice across U.S. corporations. This paper shows that firms finance these operations mostly through newly issued corporate bonds, and that the exogenous variation in the cost of debt—due to innovations in monetary policy—is key in explaining managers’ incentives to repurchase their own shares. Under our identification strategy, we find that firms are more likely to repurchase in periods of accommodative monetary policy when the yield on their bonds adjusts in the same direction. This behavior has macroeconomic implications, as it diverts resources from investment and employment, thus reducing the transmission of accommodative monetary policy at firm level.

JEL-codes: E52 G11 G32 G35 (search for similar items in EconPapers)
Date: 2023
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