ESSAYS ON IMP ACT OF BUYBACKS ON BONDHOLDERS AND LONG-TERM SHAREHOLDERS

This dissertation investigates the consequences of stock repurchase programs on long-term shareholders and bondholders. In the first essay, I present evidence that stock buybacks reduce investment inefficiencies associated with short-term ownership. For a sample of U.S. firms from 1988 to 2018, I first document that stock buybacks are associated with lower and short-term investors with higher corporate investment and net hiring. However, contrary to the conventional view, I find that buybacks reduce overinvestment related to short-term owners rather than increasing underinvestment. I conclude that firms have been using buybacks as an efficient mechanism to align the interest of short-term and long-term investors. Results are robust to alternative measures of stock repurchase and ownership investment horizon and to endogeneity concern
In the second essay, I test the signaling and wealth transfer hypotheses for share repurchase announcements using daily bond and stock returns. I distinguish between governance mechanisms protecting shareholders or bondholders and between internal and external shareholder governance strength. I find that stock and bond returns react positively to buyback announcements only at companies with strong internal shareholder governance mechanisms. Moreover, I reveal the positive impact of internal governance on the relation between stock and bond return is more pronounced in the firms where managerial compensation is more tied to stock performance and where the wealth transfer is expected. I found no evidence that high short-term oriented ownership increases the wealth transfer in repurchase announcements. Finally, I show that bonds with distribution covenants are negatively impacted by repurchase announcements, which supports the view that the market punishes these bonds when firms are likely to use repurchase stocks
to bypass their covenants.