When Apple Inc. recently announced its program to buy back $10 billion in stock, commencing during its 2013 fiscal year, critics of stock repurchases took notice. Conventional wisdom suggests that when a company’s stock price lags, it should repurchase its stock if it has available cash reserves or access to financing on attractive terms. If the company is truly undervalued by the market, the buyback of shares occurs at a favorable price to the company. The company’s intervention into the trading market for its shares presumably helps to either boost or stabilize its stock price, and in a declining market to mitigate further price declines.
Recent studies demonstrate, however, that not all stock repurchases generate stock price increases, and the reasons for undertaking them vary. In light of this, if the intended results of stock buybacks vary so much, should boards be held to a higher standard in approving such programs?
Correcting a Common Misconception
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