When Do Share Repurchases Increase Shareholder Wealth?

6 Pages Posted: 24 Aug 2006

See all articles by Richard J. Fairchild

Richard J. Fairchild

University of Bath - School of Management

Abstract

A popular misconception among practitioners and academics is that repurchasing shares can increase the share price, since total earnings and market capitalization are spread over a smaller number of shares outstanding. I present a numerical example that demonstrates the fallacy of this view. I demonstrate the irrelevance of share repurchasing when markets are perfect. I argue that the misconception may result in value-reduction if it means that firms become obsessed with using cash flow to repurchase shares rather than investing in positive NPV projects. I discuss the possible reasons identified by researchers for share repurchasing to enhance firm value.

JEL Classification: G32, G35

Suggested Citation

Fairchild, Richard J., When Do Share Repurchases Increase Shareholder Wealth?. Journal of Applied Finance, Vol. 16, No. 1, Spring/Summer 2006, Available at SSRN: https://ssrn.com/abstract=926170

Richard J. Fairchild (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom
01225 323456 (Phone)
01225 323902 (Fax)

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