COMMENTS AND COMMUNICATIONS: Management of Share Repurchases

Corporate share repurchase activity increased significantly over the last 20 years and became gradually an important way to return cash to the shareholders. Many companies paying no or little dividends are involved in large share buyback programmes. Repurchase transactions may come into managements consideration for different reasons. First, the operating cash flow may exceed significantly corporate investment needs. If a company generates excess cash it may consider returning some of it to the shareholders or investing it and creating cash cushion against potential business downturns. There exist several well-known methods of returning cash to the shareholders, such as share buybacks, regular and special dividends and a lot of research has been devoted to the study of reasons motivating these operations (see Grabowski, 2002, and references there). Second, the issue of new shares may cause substantial dilution that has to be countered. Except standard seasoned offerings companies issue shares mainly in connection with the employee stock option plans and acquisitions. Managing the option plan must involve calculating the benefits/savings of cash against future exercise and dilution and potential repurchase cost.