Capital structure, equity mispricing, and stock repurchases

Alice Adams Bonaimé, O. Öztekin, Richard S. Warr

Research output: Contribution to journalArticlepeer-review

44 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)182-200
Number of pages19
JournalJournal of Corporate Finance
Volume26
DOIs
StatePublished - Jun 2014
Externally publishedYes

Keywords

  • Capital structure
  • Equity mispricing
  • Market timing
  • Residual income model
  • Share repurchase
  • Target leverage

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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