Does leveraged stock buyback improve firms’ profitability?

Department or Administrative Unit

Finance and Supply Chain Management

Document Type

Article

Publication Date

4-2021

Journal

Applied Economics Letters

Abstract

We provide a structural explanation about how and when leveraged stock buyback improves firms’ profitability. We find operating profit on equity and operating profit sensitivity on debt are crucial factors to consider when determining the source of stock repurchase. Our theoretical reasoning and empirical tests show that companies with high operating profit on equity and low operating profit sensitivity on debt have a higher chance of improving profit through leveraged buyback. We also suggest a structural form to estimate leveraged buyback and cash buyback based on financial variables instead of companies’ disclosure.

Comments

This article was originally published in Applied Economics Letters. The full-text article from the publisher can be found here.

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