Why Firms Buy Back Their Own Shares

1986 WordsFeb 16, 20188 Pages
In this section I will discuss the many reasons why firms buy back their own shares, the theoretical explanations, and the empirical findings I have found in previous research. Theoretical Background Traditionally, dividends have been the primary approach for firms to return cash or assets to their shareholders. However, they constitute only one of many ways available to the firm to make a payout to shareholders. Firms can return cash to stockholders through share repurchases, where the cash is used to buy back outstanding stock in the firm, increasing the proportion of shares that it owns thereby reducing the number of shares outstanding. Consequently, increasing earnings per share. A share buyback affects the assets of the firm by reducing a firm’s cash balance. A share buyback also reduces the book value of equity and the overall market value of equity in the firm. Additionally, a share buyback decreases the number of shares outstanding and is often accompanied by a share price increase. Stockholders who choose not to sell their stock back to the firm will gain indirectly from the share repurchase if the share price increases. The process of buying back stock As an alternative to a dividend payment to shareholders, a firm can use the cash to buyback shares. The shares a firm buys back are kept in the treasury and are resold if the company needs money. A firm can repurchase shares in the following four ways. A firm can announce its plans to repurchase shares in

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