Academic journal article Journal of Accountancy

Survey Says Stocks Show Large Gains in Buybacks

Academic journal article Journal of Accountancy

Survey Says Stocks Show Large Gains in Buybacks

Article excerpt

A company may repurchase its shares to optimize its capital structure or to increase share price over the long term by increasing existing shareholders' portion of future cash flows or some other reason.

These assumptions were confirmed in a study by the Financial Executives Research Foundation (FERF), based in Morristown, New Jersey, which looked at 200 companies that had completed share repurchase programs from January 1, 1991 through December 31, 1996. The study documented the average share-price effect between 1997 and 1999.

Nikhil P. Varaiya, finance department chairman at San Diego State University, and S.G. Badrinath, a professor of finance at Rutgers University, who undertook the survey, studied the impact of share repurchase programs on a company's profitability, growth and leverage ratio as well as the price of shares over the three-year period.

Among their findings was that small cap companies (with market capitalization of less than $500 million) "showed substantial increases in growth" after the repurchase of shares. The researchers also concluded that distributions to shareholders through share repurchases did not replace payouts of dividends and that such repurchases neutralized the effect of other share issuance programs, such as stock options, that could dilute share price.

The survey found that sometimes companies repurchase shares to return capital to shareholders more efficiently or to redeploy excess cash flow. …

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