Leveraged Share Repurchase: A Tax-Based Explanation

Abstract

This paper investigates a corporate tax-based and shareholder tax-based explanation for a firm’s decision to finance a stock repurchase by utilizing debt, commonly referred to as a leveraged share repurchase. I find that during tax regimes in which corporate tax rates are more favorable for the use of debt, and during tax regimes in which shareholder tax rates are more favorable for firm distributions of funds to shareholders through stock repurchases, firms are more likely to aggressively utilize debt to undertake a leveraged share repurchase. Further supporting this claim, I find that firms aggressively utilize debt to fund leveraged share repurchases when they are likely to have low share turnover, suggesting that a greater percentage of shareholders qualify for preferential long-term capital gains. In contrast, I find that a firm is less likely to undertake a leveraged share repurchase if the firm has high stock turnover, low stock appreciation, or has greater ownership by short-term institutional shareholders. Overall, my results support the notion that corporate and shareholder-level taxes influence corporate leveraged share repurchases.