Using Treasury "Repurchase" Shares to Stabilize Stock Markets

Article excerpt

ABSTRACT

This paper aims to examine one of the most important issues in the international corporate laws, which is the issue of share repurchases known as treasury shares. This paper investigated corporate laws, stock exchange regulations, research literatures and stock trading volume for repurchase activities. Covering a sample of thirty-five countries developed and emerging markets.

The study found that there is an increasing movement in the world stock market towards adopting or deregulating the share repurchase activities, More than half of the selected sample witnessed a change in the related laws (especially corporate laws) of share repurchases during the period 1995 to 2000. Moreover, there is a toleration to use the treasury share in enhancing the stock market during stock crises and extraordinary market price volatility. Based on upon findings, a modal has been suggested and articulated to be considered as a stabilization instrument for stock marketing.

JEL: G14, G18, G35

Keywords: Share repurchasing; Corporate laws; Stock market stability

I. INTRODUCTION

The share repurchases is considered as one of the most significant issues in the corporate laws, due to the significant differences that exist in the world corporate laws. Major changes have been taking place concerning the share repurchases in the world stock market during last decade. First: The size of repurchases trading volume as an alternative to dividends has increased significantly. Second: many countries introduced the concept of share repurchases by corporate firms in the last five years. Third: many countries that already legitimized the share repurchasing activities are deregulating, and relaxing conditions and rules to encourage corporations using repurchases as an alternative to dividends, as well as, to serve other purposes including improving of stock prices. Fourth: Other countries moving from share repurchases activities towards holding the repurchased shares in treasury. Fifth: some countries are introducing more liberal rules applying to treasury shares to enhance the stability of stock markets.

The main purpose of this study is to investigate the issue of share repurchases in the world stock market, in order to suggest a new model of using a treasury stock as a stabilizing instrument in the stock market. In various countries, corporations might repurchase part of their own common stocks, which are fully paid, legally issued, in order to be cancelled or to be held for reselling. While considered as illegal by many other countries, the general known methods of share repurchasing are: repurchase from open market, Dutch auction, fixed price tender offer repurchases, repurchase from off market and equal access repurchases. Repurchasing of its own shares by a firm is known as share repurchases or shares buybacks. If the repurchased shares are held for limited or unlimited time for future uses or reselling, they are considered as treasury shares. Generally, corporations may repurchase their own shares for one or more of the following reasons: to use for pension and compensation plans for employees, to invest some of the surplus cash, to be used as a substitute for dividends which may have a positive effect on the stock market prices of the company, to establish a market and create additional demand for the company's shares, to adjust owners' equity and capital structure, to take over defensive steps by reducing the public floating shares, to gain tax advantages, to increase earning per share by reducing the outstanding shares of the firm, and to meet merger needs.

This paper suggests another purpose for a corporation to repurchase and hold its own shares. The suggestion is to use the repurchase activity as a new financial instrument, in order to sustain the stock market price in case of market crisis produced by adverse information and overreaction. The high volatile stock prices, which may lead to stock market crises, have continued to occur in both developed and emerging stock markets in the last fifteen years. …