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Is a Share Buy put up Right for You? 5/14/2001 With the economy slowing and markets floundering, is the time ripe for buying back your alliances shares? Perhaps. But what messages does a buyback send to the securities industry? How does it create value for your firm? In this HBR article, Stern Stewarts Justin Pettit explains how buybacks sack up bolster a sagging familiarityâ€"but rear end also backfire, unless executives understand the whys, whens, and hows. by Justin Pettit | | | | Contrary to the common wisdom, buybacks wear downt create value by increasing earnings per share. The company has, after all, spent cash to purchase those shares, and investors will countersink their valuations to reflect the reductions in both cash and shares, thereby throneceling bulge out any earnings-per-share effect. If increasing earnings per share were the only rule for buybacks, they would have no impact on valueâ€"which, as weve seen, is certainly not the case. Buybacks affect value in deuce ways. First, the buyback announcement, its terms, and the way it is implemented all convey signals most the companys prospects and plans, even though few managers publicly love this.

Second, when financed by a debt issue, buybacks can significantly change a companys capital structure, increasing its reliance on debt and diminish its reliance on equity. Signaling The signaling effect of share buybacks has been the focalize of much academic research over the knightly decade years. According to these studies, investors and analysts use a companys financial decisions as a window into what management originally thinks about the companys prospects. The announcement of a share buyback, the argument goes, indicates that managers are so confident of their companys prospects that they believe the best investment it can make is in its own shares. If only it were that simple. In real life, investors interpret a companys decisions through the lens of past experience and in its current context, taking into account a host of... If you want to get a full essay, ready it on our website: Ordercustompaper.com

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