Authors: Angeliki Drousia, Athanasios Episcopos, George Leledakis

Title: Share repurchases: Motives, methods, and effects

Abstract

Share repurchases (SRs) or stock buybacks relate to several financial issues in a firm. For example, SRs could be studied as a corporate investment, payout, capital structure, and ownership structure decision.

The popularity of SRs has increased globally in recent decades. There have been dramatic changes in the legal environment towards increasing transparency and immediate disclosure to the investing public, and researchers turn to markets outside the USA with differing types and levels of regulation. A common requirement for a company to conduct an SR is to authorize a Share Repurchase Program (SRP). The basic questions examined in the literature are why firms approve SRPs, when these programs are carried out (if at all), and what the market reaction is.

The main SR methods are open market share repurchases, fixed price tender offers, Dutch auctions, private negotiations, and repurchases through transferable put rights. Regardless of method, it is an empirical regularity that announcements of repurchases have a positive effect on stock prices. Investors greet favorably announcements of SRPs as well as announcements of actual trades through a repurchase program. However, there are many differences among countries, because the particular institutional framework influences return and market efficiency differently in each case.

The paper highlights the theory and practice of repurchases, especially in Europe, where there has been an effort to unify the rules affecting repurchases and level a common playing field for firms and investors. Viewing SRs from different angles depending on the buyback identity is a useful way to understand the motives behind and the mechanics of SRs, as well as their short- and long-term effect on the firm.