Buyback Common Stocks

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

Companies may buy back issued shares in response to various concerns; the key is cutting 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 firm’s operations. As a result, participation in such decisions involves a further reflection on the firm’s expectations 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.

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The buyback of common stocks may address concerns regarding the store’s price. Investors tend to be more concerned about the share price and their implication on the firm’s performance. Issuing new shares tends to hurt the stock performance due to the repercussions suggested to the dividends. New shareholders expand the dividend-sharing population. As a result, the stock performance tends to drop as investors offload their stakes in search of profitable shares (Hillert et al., 2016). On implication, a firm may buy back the issued shares to manage the impact suggested on the share prices.

The third reason a company may opt to buy back the issued share firm is to address the generated income’s financial concerns. Ideally, a firm’s operations tend to firm based firm’s 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 remain unattractive to the shareholders and the eventual impression associated with the firm’s financial position). As a result, the firm may buy back such shares to attain the desired image in economic performance.

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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 We’llmarket share repurchases. Journal of Banking & Finance, 58, 405-417.

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