Buy Back of Shares means the purchase of its own shares from its existing shareholders usually at a market price or premium through open-market purchase or tender route. Buy Back of equity shares is an imperative mode of capital restructuring. It is a corporate financial strategy which involves capital restructuring and is prevalent globally with the underlying objectives of increasing Earnings per Share, and for averting hostile takeovers.How is it relevant in these days?
Hi Sanjeev,
Firms adjust their financial/capital structures as per the demand from financial and economic environment. The concept of share re-purchase can be contextually the same, but its application may change as per requirement from firm's existing environment. Accordingly, it is possible to say: " Companies, like individuals, never stop evolving. Competitive pressures, shareholders' demands, management decisions and regulatory and political environment, all warrant that companies keep on reinventing themselves and adapt to change. Operational, managerial and financial dimensions may therefore, often be subject to restructuring. Approaches of restructuring that a company may adopt include expansion, sell-offs, corporate control, and changes in ownership structure."
Source: https://www.moneyinstructor.com/doc/capitalrestructuring.asp
If you refer to the source, it may give you some basic explanation.
However, how a share repurchase acts as a tool for financial restructuring can be read from the following paper, as a case study and as an example to you.
http://euroasiapub.org/wp-content/uploads/2017/03/9FMFeb-4563-1.pdf
Hope this will help you. Good luck.
Hi Sanjeev
The question you ask is interesting. I think of several possibilities depending on the circumstances that occur in companies.
1.- Companies in restructuring processes with capital deficit and deficient cash flow generation capacity should not deteriorate their financial position amortizing equity, or repurchasing shares, because it weakens their capital position. This deterioration can directly increase financing costs and affect the solvency of the firm.
2.- Companies that have come out of restructuring processes with a comfortable positioning of equity and good cash flow generation with good profitability of their sales could invest liquidity in the repurchase of shares. This strategy could increase the return on equity in the medium and long term if the cost of the debt is lower than the performance of the shares.
Regards.
Dear Sanjeev
I will define "recent days", given that we are in academia, as the most recent 15 years. Here are some recent relevant citations:
http://forum.johnson.cornell.edu/faculty/michaely/the%20information%20content%20of%20share%20repurchase%20programs.pdf
Article Operating Performance Following Open Market Share Repurchase...
https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/credibility-of-open-market-share-repurchase-signaling/59ADD582C2F505C58CED025811EA82BF
Article The dividend and share repurchase policies of Canadian firms...
https://edoc.hu-berlin.de/bitstream/handle/18452/4304/cclm.1982.20.3.147.pdf?sequence=1
Article Share Repurchase, Executive Options and Wealth Changes to St...
Article Share Price Performance Following Actual Share Repurchases
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