As the stock market falls to historic lows and governments are coming to the rescue in the form of bailouts and subsidies, the practice of stock buyback is facing extra scrutiny.
Corporations flush with excess cash sometimes opt for share buybacks, which involves a company repurchasing its own shares at market value, and reducing the number of shares that are being traded. This can result in driving up the price of its stock and may increase overall demand for it.
Others, however, may shelve their plans to repurchase their stocks — so as to ensure they have sufficient cash for emergencies, for example.They say that companies that engage in the practice are inflating their stock prices artificially. Critics also highlight the fact that companies using their excess cash for stock buybacks would be diverting cash from other important investments, such as higher employee wages, building more factories, creating more jobs, and innovation..
On the other hand, buyback supporters maintain that the money gained by shareholders is usually reinvested in other companies, and thus, stimulating economic growth. However, this is also contentious. "Stock buybacks do not invest in the economy and create positive externalities and additional benefits," Emir Hrnjic, an adjunct assistant professor from the National University of Singapore Business School, told CNBC in an interview. "They only help maximize shareholders' wealth and perhaps, they may help with the market sentiment."
are a cost or benefit that impacts a third party when an economic transaction takes place — the third party has no control over that transaction.During a U.S. Securities and Exchange Commission ruling in 1982, rules were established to ensure that stock buybacks were only done by companies if they fulfilled certain conditions. The need for these conditions in the first place, meant that the risk of market manipulation on the part of the companies existed.While mainly a U.S.
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