Leverage Change, Share Repurchases, and Capital Expenditures

Abstract

Critics of share repurchases maintain that firms forego capital expenditures to boost their share price short-term while other researchers provide evidence that some repurchasing firms concurrently increase capital expenditures. Using a matched sample approach, this study examines the repurchasing and investing behavior of 17,466 firm-year observations for the period 2000 through 2019. We find that the financing of share repurchases affects the level of concurrent investments; that is, compared to cashfinanced repurchasing firms, debt-financed repurchasing firms increase concurrent capital expenditures. This finding is not as surprising as it seems as firms that take on more debt reduce their weighted average cost of capital, which allows managers to increase capital expenditures, as projects that were previously Net Present Value (NPV) negative may now become NPV positive. We follow this up by examining the interaction between a change in leverage and concurrent capital expenditures and find support for that notion. We also find that this is especially the case with firms that are not already heavily leveraged.