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

Abstract

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The influence of undervaluation, free cash flow, leverage and dispersion of ownerships toward company’s stock repurchase (An empirical study of Indonesia stock exchange public listed companies)

“…Based on above results it may be concluded that stock repurchase is still the best option for investors to distribute the excess fund, as we have seen that the indicators of investors based valuation also supported this issue. This result is in line with the results from Elton & Gruber (1968) whereas in any corporation's there will usually be some stockholders who will lean cash dividends and some who will incline stock repurchase as a method of cash disbursement. Based on the t test to assess whether there was a linear in luence of the independent variables undervaluation (X1), leverage (X2), free cash low (X3) and dispersion of ownerships (X4) toward company's stock repurchase (Y ), the study has shown that leverage and dispersion of ownerships show a positive and signi icant in luence toward the company's stock repurchase.…”

“…Based on above results it may conclude that stock repurchase can still be the best option for investors to distribute the excess fund, as we have seen that the indicators of investors based valuation also supported this issue. This research result is in line with the results from Elton & Gruber (1968) who commented that some of the companies' shareholders will prefer to choose cash dividends and alternate stockholders might prefer to choose the stock repurchase for their money disbursement technique purposed. Therefore, the factors of the independent variables undervaluation (X1), leverage (X2), free cash low (X3) and dispersion of ownership (X4) are still becoming the best consideration for stockholders in performing stock repurchase, thus, also supporting that the purpose of stock repurchase is to recover the decline of stock value.…”

Valuation with share repurchases and personal taxes

“…Share repurchases lead to stock price appreciation and subsequently to capital gains, which are taxed differently from cash dividends. In the past, the tax rate on capital gains used to be lower than that on cash dividends (e.g., Bierman and West, 1966, 1968; Elton and Gruber, 1968a, 1968b). This still holds for some countries, such as the US, but other countries, such as Germany, now use the same tax rate for cash dividends and capital gains.…”