Selling own common stocks - Research Paper Example

These methods are open market, fixed price tender, private negotiation, repurchase and Dutch auction. It was in the late 20th century that there was enormous increase in the share’s volume repurchase in American, which rose from $5 billion in the year 1980 to $349 billion in the year 2005 (Stock Buybacks). It has been noted that the reason behind the corporation’s enormous amount of repurchase and selling of their own common shares is subjected to some conflicting interpretations. However there is no satisfactory explanation to these changes that occurred in the repurchasing activity of these corporations over the last few decades.

The dramatic increase in the repurchase of open market shares occurred in 1990’s and several factor led to its development. One of the factors is considered to be the improved regulatory environment which supported the repurchase of common stock which resulted from the adaption of rule 10b-18 introduced by the Security and Exchange Commission, or SEC in the year 1982. Another factor that contributed to the repurchase is considered to be economic conditions. This paper discusses the reasons why corporation sell and purchase their own stock.

A study was conducted regarding the open market repurchases which concluded that it is the changes in the compensation policies that often led to the changes in the payout policy. The result also indicates that the firm usually announces repurchases when executives have several different options outstanding and when the employees too have several options present that are exercisable. Once the firm makes the decision of being engaged in a repurchase, the amount of stock repurchase can be positively related to the total number of options that were exercisable by the workers, independent of the option that the executives had.

The result of this study remains consistent with the managers repurchasing both for funding