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IN THE PAST DECADE major U.S. corporations have increasingly repurchased significant amounts of their own common shares. The reasons for this development and its implications for the theory of share valuation and for public policy, however, have been subject to numerous, and often conflicting, interpretations. This paper presents a theoretical analysis of the economics of share repurchasing which leads to some fairly definite conclusions concerning the questions of share valuation and public policy. I. THE BACKGROUNDIt is not difficult to illustrate the dimensions to which corporate share repurchasing has recently grown. A survey of the repurchasing activities of companies listed on the New York Stock Exchange revealed that in 1963, for example, 132 firms "repurchased enough of their own common shares to account for 5%o or more of the total trading in their securities."' Share repurchasing was, in fact, such a popular corporate activity in 1963 that "the total dollars spent by companies to buy back their common shares was 30% greater than the amount which they raised through (new) equity issues."2 Moreover, in both 1964 and 1965 manufacturing, commercial and transportation corporations continued to be net purchasers of stock.The growth of corporate share repurchasing has aroused considerable interest, and a number of explanations of the motivation behind this activity have been suggested. It has been argued, for example, that firms sometimes buy back their own shares to have them available to acquire other companies or to fulfill the obligations of stock option plans.4 Unquestionably, some repurchasing has been done for these reasons. Income tax considerations may make it possible for firms to acquire other companies more cheaply for stock than for cash, and use of stock options as a form of executive compensation has been widespread. However, it seems quite unlikely that the rapid growth of share repurchasing in recent years can be explained by merger and stock t We appreciate assistance offered

The standard approach to inventory policy ignores the effect of inflation. This paper investigates a model that includes both inflationary trends and time discounting. The paper compares this model with the standard EOQ model and the analysis for a one-time change, found in previous literature. INVENTORY DECISIONS UNDER INFLATIONARY CONDITIONSIn a situation in which the inflation rate for all of a firm's cost factors is expected to be 12% in the coming year, what effect should this increase have on the firm's inventory policies? What other information would management like to have? Will the usual economic order quantity (EOQ) solution tend to require adjustment?Unless the decision-makers have been systematically studying the effects of inflation on decision-making, they would have difficulty arriving at answers to these questions. This paper will first consider the implicit assumptions of the economic order quantity model and will then study the effects of relaxing these assumptions. The EOQ ModelThe basic economic order quantity (EOQ) model does not explicitly take into consideration either the time value of money or the rate of inflation. The amount to be ordered, denoted by Q, is Q = (F) 'A where K = the ordering cost per order D = the demand rate per year in units k = holding cost per unit per year. *The authors would like to thank A. Wayne Cercorak, University of Massachusetts, for several helpful comments . 151

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