Share Buybacks, Monetary Policy, and the Cost of Debt

Share buybacks have become common practice across U.S. corporations. This paper shows that firms finance these oper-ations mostly through newly issued corporate bonds, and that the exogenous variation in the cost of debt-due to innovations in monetary policy-is key in explaining managers' incentives to repurchase their own shares. Under our identification strat-egy, we find that firms are more likely to repurchase in periods of accommodative monetary policy when the yield on their bonds adjusts in the same direction. This behavior has macro-economic implications, as it diverts resources from investment and employment, thus reducing the transmission of accom-modative monetary policy at firm level.