STOCK REPURCHASES

"Stock Repurchases in the 21st Century: Theory, Evicence and Implications"

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 Obiettivo del progetto (Objective)

'Stock repurchases are an important tool for returning cash back to shareholders. Since their regulation in the US in the mid 1980s, stock repurchases have experienced dramatic growth. EU countries, however, started allowing public corporations to buy back their shares only in the late 1990s. Moreover, firms in EU countries that do start repurchases fail complete them. For example, UK and French firms end up repurchasing only 28% and 10% of their declared intention, respectively, in comparison to about 80% in the US. Without good free cash payout mechanisms companies and markets cannot be efficient, and economies cannot thrive. Why do repurchases efficiently disburse cash in the US but not in the EU? What can be done to make repurchases work in EU countries? The purpose of this project is to help understand the properties and limitations of repurchases. The results will provide guidelines to governments how to regulate repurchases, to firms when to repurchase, and to investors how to adjust their investment strategies when firms they invest in announce a repurchase.'

Introduzione (Teaser)

Stock repurchasing has successfully been used to invigorate companies and the economy in the US. Now, Europe wants to reproduce the success of this model too.

Descrizione progetto (Article)

There are many ways to strengthen the economy in Europe, and one of these is thought to be the concept of stock repurchase. When a company buys back its own shares from the market, it is usually because it believes the shares are undervalued and it wants to raise the market value of the remaining shares. This is the idea behind stock repurchase, considered a healthy way to buoy the share value of a company and retain competitiveness.

This practice, which has been very common in the US since the mid-1980s, has only been allowed in Europe in the late 1980s. It is considered an important tool for returning cash back to shareholders and has helped spur considerable market growth in the US.

But for many reasons stock or share repurchase has not worked well in Europe, and the EU-funded project 'Stock repurchases in the 21st century: theory, evidence and implications' (Stock repurchases) aims to find out why. The project is investigating the theory and implications behind these repurchases. It wants to enlighten governments on how to regulate repurchases, advise firms when to repurchase, and inform investors how to adjust their investment strategies.

To do this, the project partners need to understand the economic properties and limitations of repurchases, how they are used by companies and how they are affected by regulation. So the project has undertaken a theoretical study about execution of repurchases and another about the choice between repurchases and dividends.

Predictions for the first study were validated, giving clearer insight into how repurchases should be done. Meanwhile, the second study, which was also completed, revealed some valuable results, e.g. when it is better to use available cash for dividends and when it is better to use it for stock repurchases.

These results were unveiled during various high-level conferences such as the Western Finance Association meeting in 2009. The results were also discussed in various academic settings including University of Mannheim, University of Houston, Babson College, Bentley University and Boston University.

Armed with this new set of knowledge and study results, European companies will be able to utilise stock repurchases much more effectively, reinvigorate corporations, remain competitive and encourage economic growth.