Stocks Repurchase

Since the early 1980s, the use of share repurchases by American firms has increased dramatically. In 1984, for example, firms spent $39.4 billion on stock repurchases and $255.26 billion in 2000, which represented approximately 26 percent of their total annual earnings (Dittmar and Dittmar, 2002; Chan et al., 2004). For some firms, stock repurchase activity was large, representing a significant part of equity, such as for IBM Company which bought $772 million between 1995- 1998, equal to 46 percent of its total outstanding shares (Roehner, 2005). More recently, as other countries have begun removing tax and regulatory impediments to share repurchases, there has also been a dramatic increase in repurchase activity outside the US.

Repurchase programs were also developed in several countries outside the US. Some of them adopted new legislative rules to introduce these programs for the first time, like Japan in 1995 or Finland in 1997. Other countries approved some legislative changes to encourage firms to be more familiar with these programs like the United Kingdom in 2003

Indeed, stock repurchase activity was first regulated in the United-States long-ago with relatively lax rules. The only regulatory guide for carrying out repurchases was the Security Exchange Commission (SEC)’s “safe harbor” Rule 10b-18, which described a code of conduct that, if followed, protected firms against charges of share price manipulation.

In recent years hundreds of U.S. corporations have engaged in programs to repurchase tens of billions of dollars worth of shares of their own stocks. Studies have indicated that corporations have implemented stock repurchase programs for a variety of reasons, including: (1) providing a signal to investors that the stock is a good investment; (2) the availability of excess cash; (3) management’s perception that the company’s stock is undervalued; (4) the need for company stock to be provided for stock option and retirement plans; (5) the desire for...