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THE EFFECTS OF SHARE BUYBACK IN THE FINANCIAL RESTRUCTURING OF COMPANIES

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Author(s): Valentina Duvnjak | Nebojša Balaban

Journal: Zbornik Radova Ekonomskog Fakulteta Istočno Sarajevo
ISSN 1840-3557

Volume: 5;
Start page: 171;
Date: 2011;
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Keywords: action | signals | manager | purchase | value

ABSTRACT
Companies in mature industries,which generate high and stable cash flows but lackgood investment opportunities, do not know how touse surplus cash. Apart from one-time and specialdividend payments, management has a possibility ofshare buyback implementation. Theoretically, thisrepurchase of shares increases their market value.The goal of such share redemption may beconcentration of ownership. In order to preservecontrol and protect the firm from overtaking, acompany may use defensive techniques of sharebuyback. Announcements of proactive sharebuybacks always result in significant positiveabnormal returns on shareholders’ equity. Shorttermmarket reaction to the announcement fails tocapture the impact of shares repurchasecompletely; therefore, even after the repurchase ofshares, abnormal returns are present over a longerperiod of time. Share buybacks may lead toredistribution of value from shareholders tomanagers by management strengthening, in casecorporate governance and market controls are notpowerful enough. The final impact of sharesrepurchases on the share price and shareholders’welfare depends on the concentration of ownership.The redistribution of value can be transmitted fromone interest group to another through tax savingsfrom tax on capital gains as well. In order to createvalue for shareholders by redemption of shares,essential factors are: signals that managementtransmits across the market, its involvement in the172 ô Валентина Дувњак и Небојша БалабанЗборник радова Економског факултета, 2011, 5, стр. 171-180ownership, and reduction of systemic risk and costof capital.
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