Buyback Common Stocks

Identify three reasons why a firm might buy back its own common stock shares.

Companies may opt to buyback issued shares in response to various concerns; the key among them is the need to cut operational costs. Ideally, the need to participate in capital generation through share issuance fetches its support from the targeted contributions of the generated funds in promoting the operations of the firm. As a result, participation in such decisions involves a further reflection on the expectations of the firm from an investment perspective (Bulow & Klemperer, 2015). Having excess capital implies meeting additional concerns, such as revenue sharing and expenses in running the firm. As a result, the firm may opt to rebuy issued common stocks to cut on the operations costs associated with their excessive issuance.

The buyback of common stocks may seek to address concerns regarding the price of the stock. Investors tend to manifest an increased concern about the share price and their implication on the performance of the firm. Issuing new shares tends to have a negative impact on the stock performance due to the implications suggested to the dividends. New shareholders expand the dividend-sharing population. As a result, the stock performance tends to drop as investors opt to offload their stakes in search of profitable shares (Hillert et al., 2016). On implication, a firm may opt to buyback the issued shares in the quest to manage the impact suggested on the share prices.

The third reason a company may opt to buyback the issued shares involves addressing the financial concerns associated with the generated income. Ideally, a firm’s operations tend to rest on the expectations expressed against the eventual earnings per share. Firms with idling or excess shares tend to complicate their earning prospect by expanding the distribution base. In most cases, such moves tend to remain unattractive to the shareholders and the eventual impression associated with the firm’s financial position (Huang, 2015). As a result, the firm may opt to buyback such shares to allow the attainment of the desired impression in financial performance.

References

Bulow, J., & Klemperer, P. (2015). Equity recourse notes: creating counter‐cyclical bank capital. The Economic Journal, 125(586), F131-F157.

Hillert, A., Maug, E., & Obernberger, S. (2016). Stock repurchases and liquidity. Journal of financial economics, 119(1), 186-209.

Huang, C. W. (2015). Takeover vulnerability and the credibility of signaling: The case of open-market share repurchases. Journal of Banking & Finance, 58, 405-417.

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Buyback Common Stocks

Identify three reasons why a firm might buy back its own common stock shares.

Buyback Common Stocks