An Investor's Strategy for Corporate Share Repurchase

Abstract

Assume an investor owns shares in a firm that is repurchasing shares. Should an investor sell? The factors affecting the investor's decision are the value of the premium paid for the stock by the firm in excess of market value and the difference between the price being paid by the firm and the investor's tax basis in the stock. Corporations tend to repurchase their shares at a premium compared to the stock's market value without the firm buying shares. With no taxes, the investor should sell if the firm is buying shares at a premium. With taxes, even though the value from holding may be more than the after-tax value from selling, the investor might still want to sell to the repurchasing corporation if there is an expectation of selling in the near future. Because it is difficult to reach easy decision rules, the recommended procedure is to do the sell-and-hold calculations on an after-tax basis to compute the values of the two alternatives available to the investor

TOPICS: Exchanges/markets/clearinghouses, security analysis and valuation