The Acquisition of Common Stock by the Corporate Issuer

Abstract

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 Effect of Share Repurchase on the Value of the Firm: Reply

“…For example, if we assume a one period time horizon the value of the firm 5. In short, we disagree with Bierman and West's conclusion in footnote 7 of [1] that any of their assumptions about the real world is as good as any other.…”

“…IN THE COURSE of our paper [4] entitled, "The Effect of Share Repurchase on the Value of the Firm," we made several comments on a prior paper by Bierman and West [1]. We commented on their paper because they were the only authors who had attempted to measure the impact of share repurchase on the value of the firm and to look at the relative importance of reasons for share repurchase in terms of an explicit valuation model.…”

Stock Repurchase by Tender Offer: An Analysis of the Causes of Common Stock Price Changes

“…11 A more thorough discussion of section 302 and the U.S. Tax Code in general can be found in Bittker-Eustice [1]. 2 Only seven offers were just fully subscribed. Further, on average, two-thirds of shares sought were tendered in under-subscribed offers.…”

How much equity capital did the Tokyo Stock Exchange really raise?

“…2 The literature has concentrated primarily on the study of the buy back operation by a single firm. See for example the works of Bierman and West (1966), Dann (1980), Masulis (1980) and Vermaelen (1981). Bierman and West, in particular, are credited with the thesis that a buy back operation reduces the size of the firm, i.e.…”