Question

How are managers placed in an advantageous position ahead of the normal investor during stock repurchases?

Answer 1

Stock repurchase means buying shares back from existing shareholders. Stock repurchase can be done from open market , giving offers to large shareholders (bulk repurchase). Repurchss of stock gives following benefits to the manager or management-

1. It will help to reduce over capitalisation of shares and thus would help management to exercise more control in decision making. It helps in corrrecting balance of capital structure.

2. In bearish market, buyback will create demand for the stock.

3. It will help increase market price of the stock if it is undervalued. Usually repurchase is exercised when market price of share is undervalued.

4. Managers or employees who have employee stock.options can be profited due to rise in prices.

5. Managers can pay better dividend to remaining shareholders after reduction of number of shares.

6. Managers can exhibit their ability to use excess cash and thus ensure there are no idle funds lying with them.