THE EFFECTS OF SHARE BUYBACK IN THE FINANCIAL RESTRUCTURING OF COMPANIES

Abstract

Companies in mature industries, which generate high and stable cash flows but lack good investment opportunities, do not know how to use surplus cash. Apart from one-time and special dividend payments, management has a possibility of share buyback implementation. Theoretically, this repurchase of shares increases their market value. The goal of such share redemption may be concentration of ownership. In order to preserve control and protect the firm from overtaking, a company may use defensive techniques of share buyback. Announcements of proactive share buybacks always result in significant positive abnormal returns on shareholders’ equity. Short-term market reaction to the announcement fails to capture the impact of shares repurchase completely; therefore, even after the repurchase of shares, abnormal returns are present over a longer period of time. Share buybacks may lead to redistribution of value from shareholders to managers by management strengthening, in case corporate governance and market controls are not powerful enough. The final impact of shares repurchases on the share price and shareholders’ welfare depends on the concentration of ownership. The redistribution of value can be transmitted from one interest group to another through tax savings from tax on capital gains as well. In order to create value for shareholders by redemption of shares, essential factors are: signals that management transmits across the market, its involvement in the ownership, and reduction of systemic risk and cost of capital.