Capital Structure Policy and Share Repurchases: Evidence from Sweden

Abstract

This paper studies capital structure policy by firms listed in Sweden between 2000 and 2017 through the lens of open market share repurchases. We assume firms have target capital structures consistent with the trade-off theory and consider equity mispricing to be a major adjustment cost. More specifically, we examine if equity mispricing influences the timing of capital structure adjustments (through share repurchases) and to what extent it affects the share price reaction. We rely on various econometrical techniques to estimate proxies for target leverage deviation and equity mispricing. Consistent with our predictions, we find that underleverage seems to trigger share repurchase programs, and that the results are more robust when we consider equity mispricing concurrently. However, we do not find that the market reacts differently to underlevered or overlevered firms, regardless of if we consider equity mispricing as an adjustment cost or not.