Corporate Stock Issue and Repurchase

Abstract

T e Spring and Autumn, 1974 issues of Financial Management carried articles [1, 4] dealing with share repurchase. Apparently there exists considerable disagreement as to both why firms repurchase their stock and the empirical methodology appropriate in evaluating share repurchase practices. Corporations have offered many reasons for issuing [7] and acquiring [3, 9] their own common stock. The reasons most often cited for a new issue are to reduce the risk associated with a highly levered firm, raise more capital for profitable investments, and take advantage of expectational differences as to price between the market and management. Major reasons suggested for repurchase are the tax advantage associated with such distributions versus dividends, the increase in leverage to increase return, and the market's underevaluation of the company's stock. All direct changes caused by the decision of management to increase or reduce the outstanding equity capitalization of the firm are explicitly considered in this study. Management has 3 alternatives. It can issue new stock, either directly or indirectly (warrants, convertibles, etc.); buy back already outstanding stock through open market purchases or tender offers; or, finally, do nothing. Only the first two alternatives are considered in this st dy. Other numerous studies include those by Ellis and Young [2] on the repurchase decision and Robichek and Myers [7] on the choice between debt and equity. The primary purpose here is to identify the characteristics of firms engaged in stock issue or repurchase activity.