Stock Buyback system: who will be benefited?

by Md. Rezaya Rabbi
March 23, 2011

http://www.weeklyblitz.net/1347/stock-buyback-system-who-will-be-benefited

Bangladesh Government is taking many types of actions and with that measures they are trying wholeheartedly to stabilize the market but at the same time it should be remembered that any unconscious decision would make the situation worsen in the long run. As number of listed companies is too few compared to the market size there is question of usefulness of stock buyback system.

The issue of stock repurchase has attained much focus of theoretical and practical research all over the world. It is often considered as one of the classic methods to raise a company's stock price.

Government is willing to introduce stock buyback system taking the same consideration. The possible ground of misuse of buyback system is that company may repurchase their own stocks to gain control of the firm. In Japan it was found that Keiretsu (business group) affiliate firms are most aggressive in repurchasing their own shares (Jun Huh, 2007). Same situation might be happened in our country also. So this issue should also be addressed in our country. Generally stock repurchase provides the firm financial flexibility, and this is the motivation and purpose of buying back shares. However, in a market like Bangladesh, where minority shareholders rights are weak and corporate information is relatively less secretive compared to other countries, it is meaningful to study whether there is any possible ground for inefficient corporate governance and expropriation of shareholder wealth. By reducing the number of shares outstanding, the interaction of demand and supply is expected to cause the stock price to float upward.

Having these reasons for executing stock buybacks, investor should be aware of the exact reasons of their company when it announces the repurchase of stocks. If the price is right and this represents the most efficient use of money, then only investor will be benefited from the stock buyback. However, if the intrinsic reasons of the company are the coverage of poor financial ratios or employee stock option plans, then investor should be on the guard. One of the negative aspects of
Share Buybacks is sign of lack of future growth of companies.

Buying back shares of a company 's stock signals to investors that the company cannot think of anything better to do with its available cash. A share buyback system is especially troubling to "growth" investors, who invest in the company's share because they see high potential future growth in both the company 's revenue and profit. When a company chooses to spend its cash on its own shares rather than reinvesting it into the company through capital expenditures or acquisitions of smaller competitors, it signals to investors that there are not many other profitable opportunities to grow the business. Share Buybacks put companies at risk. A company must know with reasonable certainty that its business is on the right track to rebound or continue to grow before it offers buyback. Rushing to buy back shares can put a company in a precarious and dangerous position. If the economy takes a downturn, the company faces some difficult obstacles, or the company 's industry hits some headwinds, the company will be in a very difficult position to sustain itself without the necessary cash. The bottom line is that inclusion of buyback clause in the company laws needs more scrutiny. Sometimes law keep some flaws that provide chance of manipulation in the future. Only the objective of stock price rise would provide more chance of manipulation for small cap companies. So there should be restriction on some sort of company like; who do not have any stock dividend payment history or shareholding pattern closely held that companies should not be allowed for buying back their shares.

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