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 operations 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 strategy, we find that firms are more likely to repurchase in periods of accommodating monetary policy when the yield on bond adjusts in the same direction. This behavior has macroeconomic implications as it exacerbates the crowding-out effect on investment and employment, thus reducing the transmission of monetary policy at establishment level