what is stock repurchase
Redemption or Buy-back, buyback (Eng. buy back - redemption) redemption by the Issuer of its own shares.
In most cases, the redemption of shares by the company are considered an indicator of surplus cash from the company, but often is a forced measure aimed against the drop in market value of the company. As a result of this operation increases net income per share, which entails the growth of confidence in the company among investors and have a positive effect on exchange rates. The buy-back of shares for their subsequent cancellation of permits to avoid blurring the capital of the enterprise due to the issue of new securities.
Why companies buy their own shares? Operations repurchase, as a rule, are carried out in order to
get rid of liquidity, which the company believes the excess,
change the capital structure,
get the benefits when calculating the tax on dividends,
reduce the risk of a hostile takeover
the use of Treasury shares to pay for the acquisition of other companies,
to transfer Treasury shares the company's employees,
improve the ratio of the the market price of the shares and earnings per share.
and the most important motive for - which can be considered to be the most rational of all others, is to get the profit from an investment in our shares because of their underestimation of the market and the excess of the intrinsic value over market value.
The procedure of redemption of the Issuer's own shares is often considered as a means of maintaining the stability of the market and demonstration of the market management of faith in the reliability of the company. In the world practice such a way to maintain the activity of the stock market is being used quite often. So, after the collapse of the U.S. stock market in October 1987, the largest of the company announced about its intention to redeem the shares for more than $9.0 billion.
After the «black Tuesday» - the terrorist attack of 11 September 2001 in the USA have been relaxed rules of repurchase of shares to maintain the stock market (when the index fell by more than 680 points). Similar steps in the conditions of world financial crisis have taken the authorities of the PRC. In September, 2008 specially created state Commission for regulation of the securities market significantly simplified the procedure, related to the reverse repurchase of shares of the companies whose securities are listed on the stock exchange. Under the new rules, for the repurchase of shares of a sufficiently disclose the intention and to inform about the deal. This eliminates the necessity to apply for and obtain approval from the regulatory authorities. This decision was intended to contribute to the stabilization of the stock markets of China, îùóòèâøåì on the negative consequences of the global crisis.
In most countries, the tax rate on dividends is higher than the tax rate on capital gains. Consequently, shareholders of unprofitable companies to pay dividends. There are studies proving that the integration of the taxes in the model of the Modigliani-Miller leads to the conclusion about the expediency of refusal to pay the dividends. So, Grullon and Michaely, have studied a sample of 2735 reverse repurchases of shares on the open market in the period from 1980 to 2000, showed that due to excess tax rate on dividends over the rate of capital gains tax as payments to shareholders may not be used on the dividends and the repurchase of shares. Allen and Michaely conducted a study of the tax effect on the payment of dividends on the market of the USA and got the following results: paying high dividends, the company reduce its cost for the existence of transaction costs, and in case of absence of the possibility of a complete risk-hedging.
