Leveraged buybacks

- Leveraged buybacks on average benefit shareholders
- Firms with lower growth prospects utilize unused debt capacity to optimize leverage.
- Ex-ante over-levered firms have lower returns and investments ex post.
- The lower returns of over-levered firms are concentrated on firms with weaker corporate governance.

Debt-financed share buybacks generate positive short-term and long-run abnormal stock returns. Leveraged buyback firms have more debt capacity, higher marginal tax rate, lower excess cash and lower growth prospects ex ante, increase leverage and reduce investments more sharply ex post than cash-financed buyback firms. Firms that are over-levered ex-ante are associated with lower returns and real investments following leveraged buybacks. The lower announcement returns of over-levered firms are concentrated on firms with weaker corporate governance. The evidence is consistent with leveraged buybacks enabling firms to optimize their leverage, on average benefiting shareholders. The benefits decrease with a firm's leverage ex ante.