Does leveraged stock buyback improve firms’ profitability?
Department or Administrative Unit
Finance and Supply Chain Management
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.
Pae, Y., & Baek, S. (2022). Does leveraged stock buyback improve firms’ profitability? Applied Economics Letters, 29(10), 939-946. https://doi.org/10.1080/13504851.2021.1899114
Applied Economics Letters