Abstract

Share repurchases (buybacks) have been a recent source of controversy due to misperceptions of their economic effects on firms and shareholders. Commentators in the financial press, financial institutions, and even politicians have misunderstood the effects of share repurchases on share prices and/or shareholder enrichment. I demonstrate the economic effects of share repurchase using financial statement analysis and a residual income valuation (RIM) approach. Consistent with decades of prior finance and accounting research, the results demonstrate that share repurchases do not contribute incremental value to shareholders. Share repurchases do not increase price per share. However, share repurchase do reduce market value, increase financial leverage and certain profitability metrics, and increase the equity cost of capital.

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