The Impact of Open Market Share Repurchases on Bondholders and Shareholders

Past studies examined the impact of open market repurchase announcements on bond and stock prices and identified its main causes, such as signaling, free cash flow, and wealth redistribution. Building on the work by Maxwell and Stephens (2003), we introduce daily bond return data to analyze abnormal bond and stock returns around share repurchase announcements and examine these hypotheses. We find a strong wealth transfer effect, as well as some evidence of undervaluation signaling. The wealth gain or loss of bondholders is a function of the size of the repurchase program, the leverage ratio, and the book-to-market ratio.