How does buying back stock affect a company's credit spread? Would it cause it to get smaller? Any clarification would be appreciated.

  • $\begingroup$ isn't that a very individual thing. In my opinion that would depend on the company in general. Or are you looking for some mathematical model ? $\endgroup$ – Probilitator Feb 24 '14 at 8:22

All else being equal, buying back stock would cause a company's credit spread to widen (increase). This is because a share buyback involves shrinking the firm's assets (spending cash to buy back the stock) and shrinking equity/retained earnings, while leaving the liabilities unchanged (or increasing them in the case of a leveraged buy back). This is an increase in leverage, which would leave the firm more exposed to bankruptcy (and hence credit risk).

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    $\begingroup$ Worth noting: dividends have the same effect. (Stock buybacks are often considered to be in lieu of dividends since the tax consequences are better). $\endgroup$ – Brian B Feb 24 '14 at 19:54

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