Reference no: EM131798572

Sometimes, when a company begins buying back its own shares, investors will do the same. Investors tend to see the buy back as a signal that earnings per share will increase thereby increasing share value on the market. Companies may, however, have ulterior motives such as missed earnings targets or executive bonuses tied to E.P.S. How can we as investors know the reasons for the purchase of stock for the treasury? Is the repurchase intention to manipulate share price or to award employees with shares? The notes to the financial statements can shed some light on the reason behind the repurchase but it is also important to look at the context of the repurchase.

There are three main ways a company can affect the value of its stock. The first is to issue a stock dividend which puts more shares in the hands of shareholders effectively lowering the value of each share. This is done to encourage wider ownership, satisfy stockholders who want a dividend but the corporation needs to conserves the company's cash, or to reduce retained earnings available for future dividends. The second is to repurchase shares on the market. This is done to increase the share value--less shares on the market means increased value of each share or increased earnings per share. There are other reasons to repurchase shares but affecting the share price is a common reason. Both of these methods of affecting share value are false if you will. Neither reflects true company growth. The third way to affect the value of stock is to report transparent, high quality earnings. This is true growth and over the longer term will be reflected in an increased stock value/price.

Please make comments on what you have read here. How do ethics play into affecting share price? Should there be more regulation around a company's transactions with respect to treasury stock. Comment on the stockholder perspective as well.