if a company declares buy back of shares, what type of signals it provides to the stock market.
if promoters also participate in the buy back, does it indicate negative future prospects of the company?
thanks in advance.
A share repurchase or buyback refers to buying back its own shares from the marketplac several researcher like Nohel and Tarhan (1998) Peyer and Vermaelen (2005) supports free cash flow hypothesis and argue that repurchase decision is an investment, a payout, a capital structure, and an ownership structure decision for the firm, and decreases its equity and increases leverage that affects the managerial behavior. according to the agency theory asset growth rates and sales growth rates decreases, capital expenditures remains stable and asset sales increases in case of repurchases own shares.. following link may be more useful
http://arno.uvt.nl/show.cgi?fid=135569
Not really. If they are sitting on a mountain of cash and have no immediate capital investment plans, it's best to go for a share re-purchase scheme.
A buyback of shares indicates that the company has excess funds for which they do not have any immediate profitable investment opportunity available. At times, there is nothing more to be read into a buyback other than the company's intention to use such funds for repurchase rather than payment of dividends. Since buyback reduces the capital base, it will increase the EPS & DPS even with same amount of profits. Also, since buyback is often done at a premium to prevailing market price, a high premium sends signal to the market that the company perceives that its shares are undervalued. Even if the promoters participate in the buyback, it doesn't always indicate negative future prospects for the company - rather the company may return higher on invested capital after buyback.
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