The motivation and effect of stock repurchase and share buybacks

This paper examines the literature on stock repurchases or share buyback and looks at alternative ways for a company to distribute value to the stockholders. As stock repurchases is an alternative to the cash dividends, there are two effects, firstly each share becomes more valuable than before because each shareholder now holds a greater percentage of ownership in the company and the increase in demand for the company's shares of stock by the company. Subsequently, the supply is being reduced and as a result prices will rise. The company can repurchase its own shares as it is an alternative way for the company to distribute value to the stockholders. Stock repurchases programs are motivated by the company to buy back its own shares from the marketplace or public and to reduce the number of outstanding shares. When the management of the company think that the share of its company are undervalued, normally they would proceed with a stock repurchases decision