Wealth transfer effect revisited : evidence from stock and CDS market reactions to share repurchase

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Wealth transfer effect revisited : evidence from stock and CDS market reactions to share repurchase

 

Author: Jim, Wai Kee
Title: Wealth transfer effect revisited : evidence from stock and CDS market reactions to share repurchase
Degree: D.B.A.
Year: 2016
Subject: Stock repurchasing.
Stocks -- Prices.
Corporations -- Finance.
Hong Kong Polytechnic University -- Dissertations
Department: Faculty of Business
Pages: viii, 101 pages : color illustrations
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2929081
URI: http://theses.lib.polyu.edu.hk/handle/200/8767
Abstract: Share repurchase is an increasingly important form of corporate payout in the U.S. for cash redistribution to shareholders as evidenced by the percentage of net income used for buybacks that has increased from 17% to 49% in 1994-2013. Share repurchase reduces assets available for bondholder claims and it can be used as a tool by shareholders to expropriate bondholders. Thus, whether share repurchase is an additional grab by shareholders is a major concern for bondholders (wealth transfer hypothesis). Both shareholders and bondholders may have clues about the performance and risk profile of firms that initiate share repurchase. However, prior studies find mixed bondholder reactions and positive abnormal stock returns around repurchase announcements. The inconclusive results could reflect different methodologies for measurement of bondholder wealth changes. The ability to generalize the results from the extant literature is complicated by mixed evidence in bond market reactions. In this thesis, I revisit the wealth transfer effect upon repurchase announcement by employing daily Credit Default Swap (CDS) spreads of repurchasing firms in 2001-2012. The 'representative bond' prices used in prior research is strongly related to bond specific and macroeconomic factors such as bond market liquidity. In contrast, CDS provides a better measurement of firm's current price of credit risk and timely captures bond market reactions to corporate events. My empirical results confirm no wealth transfer effect with the evidence of significant favorable abnormal CDS spread changes and positive abnormal stock returns around share repurchase announcements. The multivariate regression results indicate that signaling effect is a dominate factor in explaining positive bondholder reactions. The positive signaling effect is stronger for non-investment grade firms and low growth firms. Managers of repurchasing firms may have better knowledge on the component of their firm's earnings and cost structures than external investors. Bondholders of non-investment grade debts are more sensitive to positive signals conveyed by repurchase announcements.

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