Repurchasing of stock is an alternative to paying out dividend to shareholders. In the process of stock repurchase, the firm pays cash to repurchase stocks from the market in order to reduce the number of outstanding shares in the market. It also may be done through treasury stock method.
The stock repurchase option has been increased greatly over the past few years by different firms around the world due to keep control its shareholders power. However, stock repurchase option is not regular exercise by every firm rather it is exercised when any negative impact of stock price is likely to happen.
To the firm, there are some advantages over stock repurchase option and they are as follows:-
- When company has excess cash on hand and presently there is no further investment plan, the management may decide to repurchase stock from the market rather than paying higher dividend to shareholders
- Treasury stock can be used for future acquisitions or used as a basis for stock option.
- When management is holding stock, they would prefer stock repurchase rather than a dividend because of the favorable tax advantage.
- Treasury stock can be sold to the market as and when the firm needs additional funds for investment.