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Stock Repurchases in the 21st Century: Theory, Evicence and Implications

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Corporations buy back their health

Stock repurchasing has successfully been used to invigorate companies and the economy in the US. Now, Europe wants to reproduce the success of this model too.

Climate Change and Environment

There are many ways to strengthen the economy in Europe, and one of these is thought to be the concept of stock repurchase. When a company buys back its own shares from the market, it is usually because it believes the shares are undervalued and it wants to raise the market value of the remaining shares. This is the idea behind stock repurchase, considered a healthy way to buoy the share value of a company and retain competitiveness. This practice, which has been very common in the US since the mid-1980s, has only been allowed in Europe in the late 1980s. It is considered an important tool for returning cash back to shareholders and has helped spur considerable market growth in the US. But for many reasons stock or share repurchase has not worked well in Europe, and the EU-funded project 'Stock repurchases in the 21st century: theory, evidence and implications' (Stock repurchases) aims to find out why. The project is investigating the theory and implications behind these repurchases. It wants to enlighten governments on how to regulate repurchases, advise firms when to repurchase, and inform investors how to adjust their investment strategies. To do this, the project partners need to understand the economic properties and limitations of repurchases, how they are used by companies and how they are affected by regulation. So the project has undertaken a theoretical study about execution of repurchases and another about the choice between repurchases and dividends. Predictions for the first study were validated, giving clearer insight into how repurchases should be done. Meanwhile, the second study, which was also completed, revealed some valuable results, e.g. when it is better to use available cash for dividends and when it is better to use it for stock repurchases. These results were unveiled during various high-level conferences such as the Western Finance Association meeting in 2009. The results were also discussed in various academic settings including University of Mannheim, University of Houston, Babson College, Bentley University and Boston University. Armed with this new set of knowledge and study results, European companies will be able to utilise stock repurchases much more effectively, reinvigorate corporations, remain competitive and encourage economic growth.

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