What Motivates Real Estate Investment Trusts to engage in open market share repurchases in the U.S - Essay Example

vational factors for share repurchase but most of these studies excluded REITs, given the existing regulatory framework under which each REITs is required to pay 95 percent of their earnings as dividends. Under such a scenario this paper has made an attempt to find out whether the factors that motivate other firms to buy back shares through open market purchase can also influence REITs significantly in doing the same. This study has however found that the factors, which motivate other firms, are not capable of motivating REITs.

In many countries, like the Unites States, the United Kingdom, etc. companies have the power to buy back their own shares through a share repurchase program. On many occasions, management of a company can decide to buy back a particular proportion of its shares floating outside the firm. Since 1980, share repurchase by firms in the United States has increased significantly. When a firm repurchases a particular portion of its own share, it actually distributes lump sum amount of cash to its existing shareholders and takes away from them a fraction of the outstanding share of the firm in exchange of that cash.

Stock repurchase can be done through various methods. In U.S., very often the firms employ the method of open market repurchase of shares. There exist a number of studies in the field of finance and accounting researches, which have attempted to explore major motivational factors behind share, repurchase for different types of firms (Jensen, 1986; Stephens and Weisnach, 1998; Dittmar, 2000; Fenn and Liang, 2001; Jolis, 1998 etc). Most of the companies, which earn profits, make use of these profits in two ways.

First, a particular part of the profits are paid to the equity holders of the firms in the form of dividends. Second, the rest of the profits, which is generally known to be as the shareholder’s equity, are used to be kept within the firm for the purpose of using it to finance future investment projects. However, it is not