The main purposes of stock repurchase : 1. Anti-takeover measures, stock repurchase is often used as an important anti-takeover measure in foreign countries; 2. To improve the capital structure, stock repurchase is a better way to improve the company’s capital structure. Approaches; 3. Stabilizing the company’s stock price and repurchasing shares when the stock price is too low is a powerful way to maintain the company’s image.
What are the main purposes of share repurchases?
- Anti-takeover measures
Share repurchase is often used as an important anti-takeover measure in foreign countries. Repurchase will increase the company’s stock price, reduce the shares in circulation, and make it more difficult for the acquirer to acquire; after the stock repurchase, the company’s shares in circulation will be less, which can prevent floating shares from falling into the hands of attacking companies.
- Improve the capital structure
Share buybacks are a good way to improve a company’s capital structure. The use of idle funds of the company to buy back some shares has reduced the company’s paid-in capital, but the funds have been fully utilized and earnings per share have also increased.
- Stabilize the company’s stock price
Too low stock prices will undoubtedly have a serious impact on the company’s operations. Too low stock prices will reduce people’s confidence in the company, make consumers suspicious of the company’s products, and weaken the company’s ability to sell products and develop markets. In this case, the company repurchases the company’s stock to support the company’s stock price, which is conducive to improving the company’s image. As the stock price rises, investors pay attention to the company’s operations again, consumers’ trust in the company’s products increases, and the company has The possibility of further allotment financing. Therefore, repurchasing shares when the stock price is too low is a powerful way to maintain the company’s image.
The need for the establishment of an enterprise employee stock ownership system. The company uses the repurchased shares as a stock reserve for rewarding outstanding management personnel and transferring it to employees at a preferential price.
The impact of share repurchases on company profits. When a company implements a stock repurchase, the stock price will change, and this change is a superposition of two aspects: First, the net asset value per share of the company’s stock will change after the stock repurchase. Under the assumption that ROE and P/E ratio are both unchanged, there is an invariable constant relationship between the net asset value of a stock and the stock price, that is, the net asset multiple. Therefore, the share price will change in proportion to the change in NAV per share, and the change in NAV in share repurchases may be upwards or downwards. Secondly, due to the influence of the company’s repurchase behavior and the psychological expectations of investors, the market will be optimistic about the stock and the stock price will rise, which is generally always upward.