Do Share Repurchases Facilitate Movement Toward Target Capital Structure? International Evidence

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.