Question

Apple Incorporated (AI) board of directors has indicated that they will repurchase AI’s stock effective July 1st, 2020. You currently hold 100 AI’s stock. Explain in detail, the concept of “information content” to be derived from the board of director’s pronouncement. Discuss the likely impact of this pronouncement to AI’s stock price? In respect of this announcement, discuss the concept of the “signaling theory” and how will managers of AI be placed in an advantageous position ahead of the normal investor? (Word count limit (250-500)

Answer 1

In this case when board of director has indicated that they will be purchasing the stock then there would be proper information disclosure on the part of the company to the shareholders and the shareholder should be highly rational in order to take various decisions so that there should not be an information asymmetry existing between the management and the shareholders.

Shareholders should be sceptical about their stock that they would be getting repurchased and after the announcement of the board of directors the shares are going to increase because this is a positive development on the part of the company and the shares price will be increasing because the overall market cap of the company will be increasing with this share repurchase.

the concept of signalling theory will be representing that the rational investor will always be fulfilling his commitment because of risk of economic loss and penalties in case of non fulfillment of the commitments so investors will be expecting that the commitment will be fulfilled and managers will be having a advantages position because they are the ones who are taking the decisions and they would be having insider information as well.there is a clear case of information asymmetry which will be existing between the managers and the share holders of the company because managers are known to the decisions which have been made by the company regarding this share repurchase.