Debt-financed repurchases and credit ratings with the respect of free cash flow and repurchase purpose

The effects of taxes and stock repurchases on domestic and multinational companies’ debt levels

“…Following the findings in Chen et al. (2019), the coefficients for IBVOL and ZSCORE are expected to be positive, and the coefficients for MB , OCF , SIZE , RET t − 1 are expected to be negative. The coefficient for 2007/2008 is expected to be positive, since firms are more likely to receive credit downgrades during the financial crisis.…”

“…(2009) and Chen et al. (2019) test these two effects and find that credit upgrades are more likely to occur in firms that repurchase stock but do not have stock options granted to their executives. Alderson et al.…”

“…Second, stock repurchases represent a negative signal of wealth transfer from the creditors to the shareholders/executives and cause the firm's cost of debt to rise (Maxwell & Stephens, 2003). Jun et al (2009) and Chen et al (2019) test these two effects and find that credit upgrades are more likely to occur in firms that repurchase stock but do not have stock options granted to their executives. Alderson et al (2020), however, find that bondholders' wealth, proxied by the abnormal bond return, is not affected by stock buyback.…”

“…The credit rating used in this study is the Standard & Poor's long-term issuer credit ratings. The change of credit rating from year t to t + 1, or ΔRating t + 1 , is the dependent variable, similar to the model in Chen et al (2019). The credit ratings are transformed into sequential numbers: the lower the number, the higher the credit rating.…”

“…It is difficult to estimate the amount of debt raised by firms to repurchase stock without proprietary data. Chen et al (2019) use Taiwanese data, which allow them to identify the timing of the repurchase. Their test variable is the increase in debts two quarters before the stock repurchase quarter divided by the amount of stock repurchase within a 2-month timeframe.…”