Why Do Financially Unconstrained Firms Borrow to Repurchase Shares?

Daniel Gyimah, Antonios Siganos, Chris Veld*

*Corresponding author for this work

Research output: Working paper

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Abstract

We study the impact of financial constraints on cross-market arbitrage. We find that financially constrained firms are more likely to conduct debt-financed share repurchases. Such repurchases tend to reduce investments and increase financial distress risks, especially when financially constrained firms are over-leveraged. Less financially constrained firms instead tend to conduct debt-financed repurchases only when debt market conditions are favourable. Moreover, less financially constrained firms tend to issue overvalued debt to fund the repurchase of undervalued equity. These results are in line with the cross-market arbitrage hypothesis according to which firms fund repurchases during good debt market conditions even though internal funding is available.
Original languageEnglish
PublisherSSRN
Pages1-53
Number of pages53
DOIs
Publication statusSubmitted - 24 Aug 2016

Keywords

  • Debt-financed share repurchases
  • financial constraints
  • debt market conditions
  • equity undervaluation
  • investment expenditures

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