Asset Volatility and Wealth Transfers: Evidence from Stock Repurchase Announcements

Abstract

This paper helps reconcile the mixed empirical results concerning the wealth effects of stock repurchase announcements for bondholders. Traditional rating matching introduces: (i) an upward bias, particularly pronounced with smaller illiquid bonds, in estimating abnormal bond returns; and (ii) failure in identifying negative significance due to the reliance on size-weighted matching index returns. Increases in asset volatility intensify wealth transfers from bondholders to shareholders. Contrary to traditional interpretations, the positive association between abnormal bond and stock returns may not solely support the signaling hypothesis, as it already exists in absence of any announcement signal.