||This study analyzes the relation among mispricing, capital structure and stock repurchase. We want to investigate the impact of mispricing and capital structure on post-repurchase returns in different situations. Companies’ repurchase their own stocks would reduce equity and increase leverage ratio, which will influence the post-repurchase return.
According to debt ratio, we divide companies into overlevered and underlevered companies. We further divide stocks into overvalued and undervalued stocks according to the value of companies. We therefore have four groups for analysis - overlevered and overvalued, overlevered and undervalued, underlevered and overvalued, underlevered and undervalued companies. We expect the impact of company's stock repurchase on stock returns will be subject to firm's debt ratio and valuation. Stock repurchase will adjust the capital structure at the same time.
The samples are Taiwan listed companies over the period from 2000 to 2013. Our sample is from Taiwan Economic Journals database. We use the original return and abnormal return which is estimated by four-factors model to carry out our empirical. The results show that post-repurchased return in high stock price group is better than low stock price group. We think that it might be caused by momentum, because low stock price is likely to maintain in a downward trend. When stock price is high which is likely to maintain in a upward trend. In the capital structure, stock repurchase will increase the debt ratio, so when the company debt ratio is too low, stock repurchase will let capital structure close to the optimal level, which will induce positive return. On the contrary, when the company debt ratio is too high, the stock repurchase will let capital structure deviate from the optimum level, which will induce negative return, which is consistent with our expectations.