The Importance of Share Repurchases for Corporate Executives, Security Analysts, and Shareholders

Abstract

Most financial professionals recognize that share repurchases, all other things equal, should increase a firm’s stock price and earnings per share. Our goal is to provide financial executives, investment analysts, and shareholders with a practical understanding of the accounting and financial motivations for and implications of share repurchases. We provide a practical perspective, respecting the previous empirical research that has been conducted on share repurchases. Our contributions are to explain the accounting for share repurchases, simplify the interpretation of repurchases as a dividend, and explain the connection between share repurchases and share prices. As an extension to previous research, we explore the implications of repurchase program uncertainty on share repurchase price. This article should improve financial professionals’, analysts’ and shareholders’ understanding of share repurchases as an increasingly important financial management and valuation tool.