The Option to Repurchase Stock

David L. Ikenberry and Theo Vermaelen

Financial Management, 1996, vol. 25, issue 4

Abstract: Companies often announce their intention to reacquire share via open market transactions. However, these programs are not firm commitments. By design, they provide managers the flexibility to forego repurchasing stock. Managers concerned with maximizing the wealth of long-term stockholders will tend to buy back share when they view their stock as undervalued and otherwise forego repurchasing shares. We value this inherent flexibility as an exchange option in which the market price of the stock is exchanged for the true value of the stock. Hence, the announcement of a repurchase expands the company's investment opportunity set. In essence, the programs authorize management to use the firm's resources along with their "insider" valuation of the firm to the benefit of long-term shareholders.

Date: 1996
References: Add references at CitEc
Citations: View citations in EconPapers (64)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fma:fmanag:ikenberry96

Access Statistics for this article

Financial Management is currently edited by Bill Christie

More articles in Financial Management from Financial Management Association University of South Florida 4202 E. Fowler Ave. COBA #3331 Tampa, FL 33620. Contact information at EDIRC.
Bibliographic data for series maintained by Courtney Connors ( this e-mail address is bad, please contact ).