Foundations and Trends® in Finance > Vol 1 > Issue 3

Share Repurchases

Theo Vermaelen, Boulevard de Constance, France, theo.vermaelen@insead.edu
 
Suggested Citation
Theo Vermaelen (2005), "Share Repurchases", Foundations and TrendsĀ® in Finance: Vol. 1: No. 3, pp 171-268. http://dx.doi.org/10.1561/0500000007

Published: 01 Dec 2005
© 2005 T. Vermaelen
 
Subjects
Corporate finance
 

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In this article:
1 Introduction
2 Repurchase Methods
3 Share Repurchase: Regulatory, Tax and Other Drivers
4 The Economic Consequences of Share Repurchases: The Short Run
5 Why Do Stock Prices Increase Around Buyback Announcements?
6 When Do Companies Repurchase Shares? Evidence on Long-Run Performance After Repurchase Announcements
7 Dividends Versus Share Repurchase
8 Conclusion and Implications
References

Abstract

This text provides an overview of research on stock repurchases. The author presents a personal interpretation of the numerous research results published during the last 25 years starting with a description of the various methods to repurchase stock and the growing importance of buybacks around the world. The review discusses the importance of the institutional environment (i.e. regulation and taxes) for the emergence of share repurchase activity and provides an overview of short-term event-studies around repurchase announcements. The general conclusion is that, regardless of the repurchase method, stock prices increase significantly. The author discusses the extent to which various theories can explain this price increase. He also shows that managers are able to time the market buy buying back stock when the shares are undervalued. In addition, the text compares dividends and repurchases. Finally, it summarizes the main findings and implications for corporate financial policy.

DOI:10.1561/0500000007
ISBN: 978-1-933019-16-1
120 pp. $65.00
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ISBN: 978-1-933019-63-5
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Table of contents:
1 Introduction
2 Repurchase Methods
3 Share Repurchase: Regulatory, Tax and Other Drivers
4 The Economic Consequences of Share Repurchases: The Short Run
5 Why Do Stock Prices Increase Around Buyback Announcements?
6 When Do Companies Repurchase Shares? Evidence on Long-Run Performance After Repurchase Announcements
7 Dividends Versus Share Repurchase
8 Conclusion and Implications

Share Repurchases

Tax competition and coordination is one of the most pressing issues for tax authorities in modern economies, but it is a highly controversial subject. Some argue that tax competition is beneficial by forcing governments to impose efficient tax prices on residents for the provision of public services. Further, some argue that tax competition is also beneficial by limiting the power of governments to levy taxes. Others take a different view - in a world without coordinated tax policies, governments choose sub-optimal levels of public services financed by inefficient taxes that are either too high or too low by ignoring spillovers imposed on other jurisdictions. Capital Mobility and Tax Competition draws out the most important issues of uncoordinated tax policy at the international level for cross-border transactions. The discussion focuses on mobile tax bases, specifically in relation to investment and financial transactions. The main issue for consideration in this survey is whether taxation of income, specifically capital income will survive, how border crossing investment is taxed relative to domestic investment, and whether welfare gains can be achieved through international tax coordination. This survey derives some of the key results on the taxation of international investment in variants of one model of multinational investment. Finally, the authors emphasize the problem of tax competition and financial arbitrage, an issue which is somewhat neglected in the existing survey literature.

 
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