A final point emerges from this example: there is no reason to believe that the effect of a buyback will be immediate. Although short-term speculators may well bid up the price of the shares, the key benefit is to long-term investors and will manifest itself over time. When ensuring ‘appropriate’ share prices the faintest rumour of share buy-back by firms hopes ride on any announcement will alleviate the pressure upon their price. Circumstances when signalling projections are given off by the market from the share buyback, are when the buyback process is perceived to be a coded way of telling the market the company is postulating the fact the firm is expecting to have increased future cash-flows, but this also implies that the firm has exhausted profitable investment opportunities. Therefore the signal could be interpreted as good or bad news by shareholders.
Share repurchase are attractive on lieu of altering a company’s structure of capital as it has exactly the same effect as dividend payment that the form of payment is capital gain rather than gains from dividend income. Adopting share buy-back strategy has long been seen as a way of elevating the businesses share price to reflect its ‘impressive’ performance indices and confidence from company itself- this should protect the shares from being under-priced in the market. Most companies may be likely to capitalise on this system to buy-back their shares at a time there is overabundance of shares and falling prices. The aim is to purchase and hold until such a period when the market returns to bullish trends. There yet remains strong uncertainty as to the acceptability or motive behind the rudiments of the buy-back system.
There naturally remains counterarguments from leading chief executives who suggest refusal to succumb to suggestion of adopting a share buy-back strategy as a means of lifting up a firm’s share price. In contribution, it is popular belief market players should make use of information available on the corporation’s performances indicators to reflect in its equity price. During the period of sustained share price, positive news on companies share prices emulates aiding the image and perception of the enterprise in shareholders eyes. It is worth mentioning here too that not all proposed share re-purchasing is seen through to the end; merely rumours are proliferate, effectively ‘deceiving’ in my opinion, the shareholders.
Indeed, one of the trends these days is for some companies to use this ‘signalling effect’ to raise share prices. Generally speaking, leverage increasing exchange offers have significant affirmative announcement effects, where debt-to-debt exchanges in shares have no relevant effect on shareholders wealth an leveraged decreasing exchange offers have a significant depressing effect (Dietrich 1984).
Further, these points place into context the results of a study, published in, of buybacks undertaken in the U.S. during 1999. It listed the 50 companies in the Standard ; Poor’s 500 which repurchased the biggest percentage of their shares. The market price increases of only 8 of the 50 exceeded that of the S&P. Indeed, the prices of 33 of the 50 decreased and their weak results had continued into 2000. There can be further reasoning behind this however (report from CS First Boston, who compiled the data), with an offered explanation with many companies last year, big buybacks were more a reaction to some sort of distress than any portent of success.