Do share repurchases facilitate movement toward target capital structure? International evidence

• Published in: Journal of empirical finance Vol. 77; p. 101498
• Main Authors: Wang, Zigan, Yin, Qie Ellie, Yu, Luping
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2024
• Subjects: Capital structure; Share repurchases; Target leverage; G35; Target leverage; Share repurchases; G38; Capital structure; G32
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2024.101498

•Under-levered firms are more likely to buy back shares right after share repurchase legalization.•Post-legalization repurchases facilitate firms’ movement toward target leverage, especially for under-levered firms.•The facilitating effect is stronger under lower repurchasing restriction, higher dividend tax penalty, and lower financial constraint. We use a new international setting to test and strengthen identification of the “target leverage” hypothesis in the payout policy literature. We conduct a quasi-natural experiment induced by staggered share repurchase legalization in 17 economies and analyze its influences on leverage dynamics. After controlling for other repurchasing motives, firms under-leveraged before legalization are more likely to buy back shares immediately after legalization. Post-legalization repurchases also facilitate firms’ movement toward target leverage, especially when firms are under-leveraged. This facilitating effect is stronger under lower repurchasing restriction, higher dividend tax penalty, and lower financial constraint.