The management of any large organization implies the control of its assets and shares. By issuing new stocks, redistributing, and repurchasing old ones, it is possible to regulate the financial position of the company and change its policy depending on the current economic situation. However, there is the possibility that asset transactions may allow a corporation to affect the entire stock market. The purpose of this essay is to consider stock repurchase as a phenomenon and to analyze its relationship with setting stock market values.
The repurchase of shares has recently become widespread among many companies around the world due to the multiple benefits with the correct implementation of the methodology. The buyback itself is a transaction in which the issuer withdraws part of its shares from wide circulation by buying them from private investors on the open market (Leahy, 2015). As a result, the number of publicly available stocks is decreasing. Buying shares as such is not unusual; however, according to studies, in 21.5% of all cases, a company performs stock repurchase (Leal et al., 2017). Therefore, there must be some benefit to the organization in such an action, since this operation is resorted to frequently.
There are several factors can serve as the motivation for this action. A corporation may try to maintain or increase interest in its shares, which may create additional cash or prevent the opponent from absorbing the company’s assets (Leahy, 2015). The frequency of use of this method indicates the benefits of these operations for the companies themselves. However, it should be noted that any actions related to stocks that are openly available on the market affect both the market itself and financial statistics and analytics. A decrease in the number of shares in free circulation naturally increases stock value, since each remaining owner receives the rights to more of the company’s profit (Leahy, 2015). Although this operation may be beneficial for the business, as it increases the rate of income per stock, the repurchase of shares, in essence, can potentially be used to manipulate prices in the stock market.
Earnings per share (EPS) is a number that shows how much of the profits are distributed to each stock. It may seem like the larger the number, the more successful the company is. However, like any other economic parameter, EPS is calculated according to a specific formula, the numerator of which is net income and preferred stock dividends, and the denominator is the number of shares in the public domain (Leahy, 2015). Thus, by conducting a stock repurchase operation, the organization increases its EPS without affecting the net income. As mentioned above, this may mean increased profit for the remaining shareholders. Nevertheless, one parameter cannot fully reflect the success of the company. Therefore, there is the possibility of fraud with stock prices that will not reflect the actual position of the corporation in the market.
First of all, the higher the EPS indicator, the higher the value of the company will be considered. Thus, the organization will look more profitable for a variety of investments, including the purchase of shares. Taking into account the frequency of this method, it is worth considering how much it reflects the actual state of affairs. Based on the data presented above, a corporation can use the repurchase of shares to raise the stock value and attract more attention to the company. To distinguish such manipulative actions from targeted actions in favor of shareholders, it is necessary to assess the entire market situation in general, as well as the conditions in which the company is located. For example, if an organization carries out a buyback of shares, while its prices are already high, there may be a desire to raise it even more and profit from it. On the other hand, if a company uses this method in conditions of relatively low prices, such a state may become favorable for investors and bring them benefits. Therefore, value manipulations with the help of buybacks are possible, but it is necessary to assess the situation as a whole.
This method is widely used in various situations, for example, the restaurant business often uses this method to return internal money to shareholders, as this ensures the growth of the company. Moreover, according to studies, restaurant firms can spend up to 76.82% of their free cash on share buybacks, while maintaining a positive impact on the stock market (Gim & Jang, 2020). Another study shows that investors prefer to respond positively to the repurchase of shares produced by large and reliable companies. If a company has shown excellent results for an extended period, but has recently begun to experience problems, most investors will welcome a buyback (Leal et al., 2017). Therefore, when evaluating the repurchase, it is worth paying attention, firstly, to the features of this business, and secondly, to the long-term history of the company and the dynamics of its prices.
Thus, the stock repurchase is undoubtedly a useful operation that allows the organization to increase investor interest. However, due to increments, this method can be used for manipulative purposes to raise the already high price or to deceive investors. To assess the real situation, it is necessary to take into account the features of the particular type of business, as well as the dynamic history of the company and the general financial state.
References
Gim, J., & Jang, S. S. (2020). Share repurchases and stock market reactions: Messages from the restaurant industry. International Journal of Hospitality Management, 86(102457), 1-9.
Leahy, G. W. (2015). Corporate payout policy: The prevalence of stock repurchase programs and earnings per share [Undergraduate honors thesis, University of Redlands]. InSPIRe@Redlands.
Leal, C. C., Armada, M. J. R., & Loureiro, G. (2018). Individual investors repurchasing behaviour: Evidence from the Portuguese stock market. The European Journal of Finance, 24(11), 976-999.