Theory and Practice of Shares Repurchasing - Term Paper Example

Some make use of programme to inform the market of the future value of the firm or to signify that the management believes that the firm’s stock is undervalued. Another is to make use of a firm’s surplus cash flow. Finally, share buybacks are utilized to transfer wealth to shareholders. Such findings were discovered through an empirical study of 120 firms that made actual share repurchase announcements in 2004 and 2005. Correlation analysis was conducted together with a comparison of this study’s findings with the results of previously completed studies to arrive at the aforementioned conclusions.

Share repurchases have been utilized by US firms as an alternative method by which they can distribute cash to shareholders. Such method has been commonly used in the US markets even in the 1980s. However, buying back shares only gained in popularity in European stock markets, including the UK market, in the 1990s. There are several reasons why stock repurchasing has only recently increased in significance in the European markets. There are several cultural and institutional constraints that have hindered European firms from initiating the repurchase of their stock.

Lasfer (1999) pointed out several instances to demonstrate how such constraints deter the buyback of shares in European markets: “For example, in Austria, the legal system allows companies to repurchase their shares only to fulfill their obligations under the stock option plan for employees. In Sweden, companies have to go through a lengthy process to get a court approval. In the Netherlands, companies have to pay 33% withholding tax on the difference between the repurchasing price and the average paid-up capital per share.

”  The European country that has the greatest volume of share repurchases is the United Kingdom.