Repurchase of Shares

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REPURCHASE OF SHARES

In the past two decades, major U.S. corporations have increasingly repurchased significant amounts of their own common shares. The reasons for this development and its implications for the theory of share valuation and public policy, however, have been subject to numerous, and often conflicting, interpretations. The repurchase of shares is not legal under all codes of law; but in the countries where it is legal, it opens up a variety of opportunities for gains for the stockholders. In many situations, the motivation will be perfectly legitimate (a desire to shrink the size of the firm, with desirable consequences as to who receives the cash distribution), but it is also possible for one group to use this device to take advantage of information that is not available to the remainder of the investing public. The repurchase of shares is not uncommon and, barring changes in legislation, is likely to accelerate in the future. During the past 20 years, corporations have acquired significant amounts of their own shares of common stock. The repurchase of common stock has been said to have been motivated by many factors. Among these are:

Repurchased stock is used by the corporation for such reasons as mergers and acquisitions of firms, stock options and stock purchase plans, and so on. •Stock repurchase is a form of investment.

Repurchasing stock increases the amount of financial leverage employed by the firm. •Stock repurchase is a form of dividend, and, as a form of dividend payment, stock repurchase has favorable tax consequences compared with ordinary dividends. •Stock repurchase can lead to a change in ownership proportions (maintenance of control being the objective). •By taking advantage of special information, stock repurchase can improve the wealth position of certain stockholders. •Stock repurchase is a method of shrinking the size of the firm (a form of liquidating dividend). •Repurchasing stock compared to a cash...
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