Beginning with the subprime credit crunch in the USA in late 2007, which subsequently affected financial products all over the world, the global markets entered a period of severe economic downturn. The gravity of this downturn can be seen in the fact that the euro zone entered a recession, i.e., the shrinking of the gross domestic product in two consecutive periods, in late 2008.
In this context, recent finance literature (e.g., Rhodes and Stelter, 2009) advises companies to concentrate on cash management. The demand of the hour is to reduce or postpone outflows and guarantee inflows. That is, besides other measures, payouts to shareholders will be reduced. After years of two digit growth rates (Grullon and Michaely, 2002), share buybacks much sooner than dividends will therefore see substantial cutbacks.
In Germany, payouts via buybacks have only gained significant importance since 1998 . However, in the short time since then, a great deal of listed companies have been making use of the buyback method. Especially some of the larger firms listed in the DAX 30 such as DaimlerChrysler (7.5 bil. €), Deutsche Bank (5 bil. €), Münchener Rück (5 bil. €) and Siemens (10 bil. €) have recently announced sub-stantial buyback volumes (Haslauer, 2008). In this respect Sommer (2007) finds that in the approximately 10 years from the first of May 1998 to the end of 2007 the total amount of repurchased shares accounts for 50 bil. €.
Using the pause for breath that can be expected during the time of the recession, this text gives an up-to-date overview of share buy-backs as a means of payout.
In doing so, the focus lies on the question what motivates companies to pursue a buyback and which advantages in comparison to dividends exist. Furthermore I describe effects of share repurchases, on the announcement day as well as in later periods.
In critically evaluating the relevant literature, I describe the multiple motivations for performing buybacks in section 2.1. In order to do so I assign possible reasons to the three interest groups long-term shareholders, managers and short-term shareholders. I then state both legal and methodical requirements with a focus on the German market (2.2.) and show effects as stated in previous literature in part 2.3.
An empirical study in part three attempts to give a more recent understanding of market price changes as the result of buybacks performed by German blue chip companies listed in the DAX 30.
Table of Contents
1. Introduction
2. The State of Affairs in Buybacks
2.1. Reasons and Motivations
2.1.1. Long-term Shareholders
2.1.2. Managers
2.1.3. Short-term Shareholders
2.2. Requirements
2.2.1. German Law
2.2.2. Types of Share Buybacks
2.3. Effects
2.3.1. Market Price Effects
2.3.2. Earnings per Share Effects
2.3.3. Other Effects
3. Empirical Research
3.1. Sample Description and Empirical Method
3.2. Findings
4. Conclusion
Objectives & Core Themes
This thesis examines the practice of share buybacks, focusing on the motivations behind corporate repurchases and evaluating their empirical effects on stock performance, particularly within the German DAX 30 market.
- Analysis of theoretical motivations for share buybacks from the perspective of different interest groups.
- Investigation of legal and organizational requirements for share buybacks in Germany.
- Empirical study of short-term price effects of buybacks among DAX 30 companies in 2006 and 2007.
- Evaluation of the impact of share repurchases on Earnings per Share (EPS) and capital structure.
Excerpt from the Book
2.1. Reasons and Motivations
As early as 1961, Miller and Modigliani stated that, theoretically, dividend policy is irrelevant. In a perfect world4 the value creation of a company is only based on choosing the right - i.e., positive net present value (NPV) - projects. The pattern in which dividends are paid out would make no difference for neither the company nor the investors. The first can either reinvest the money right away or payout dividends and then issue new shares effectively making them independent of the payout decision. The latter can either generate an income stream by dividends or, in case dividends are not (yet) paid, generate homemade dividends by selling some of their shares. (Miller and Modigliani, 1961; Arnold, 2005, p.1010-1014)
Extrapolating from Miller and Modigliani’s ideas, one could - on a theoretical level - argue that payout via dividends and share buybacks should be treated equally by investors. A demonstration by Mauboussin (2006), shown in Appendix A, points in the same direction.
Nevertheless, there are a multiple factors deviating from the model world: For example dividends and buybacks in many countries are taxed differently, transaction costs occur, the information provided by buybacks and dividends seem to be perceived in different ways.
Summary of Chapters
1. Introduction: Outlines the economic context of share buybacks, the shift in payout methods since 1998, and the research objectives regarding DAX 30 firms.
2. The State of Affairs in Buybacks: Provides a theoretical foundation by discussing the motivations for buybacks, legal requirements in Germany, and the perceived effects on market prices and EPS.
3. Empirical Research: Describes the methodology for analyzing DAX 30 share buybacks in 2006-2007 and presents the findings regarding short-term abnormal price returns.
4. Conclusion: Summarizes the key insights, noting that undervaluation is less of a driver for German blue chips compared to other firms and that buybacks offer varied benefits depending on the investor type.
Keywords
Share buybacks, Stock repurchase, Dividends, Payout policy, Capital structure, DAX 30, Market price, Earnings per share, Agency costs, Undervaluation, Signaling, Empirical research, Investment management, Financial leverage, Corporate finance.
Frequently Asked Questions
What is the core subject of this thesis?
The thesis explores the phenomenon of corporate share buybacks, analyzing why companies choose to repurchase their own shares and what consequences this has on firm value and market perception.
What are the primary themes discussed?
The work covers theoretical motivations from diverse stakeholder perspectives, the regulatory framework governing buybacks in Germany, and the empirical measurement of market reactions to these announcements.
What is the main objective of the research?
The study aims to provide an updated understanding of how share buyback announcements affect the market prices of German DAX 30 companies, testing whether the findings align with existing literature.
Which methodology is applied in the empirical part?
The study utilizes event study methodology, specifically calculating abnormal returns using the Capital Asset Pricing Model (CAPM) for a sample of 12 buyback events in 2006 and 2007.
What topics are covered in the main section?
The main section details reasons like undervaluation signaling, reduction of cash and agency costs, optimization of capital structure, and the use of shares for employee stock option programs.
What are the characterizing keywords of the work?
The work is defined by terms such as share buybacks, payout policy, DAX 30, signaling theory, agency costs, and capital structure optimization.
How does the German market differ regarding buyback publicity compared to the US?
Due to stricter legal requirements in Germany, such as the obligation to publish ad-hoc messages, repurchase announcements are generally considered more binding and informative than in the US.
Does the author find that DAX 30 buybacks are driven by undervaluation?
No, the empirical findings suggest that undervaluation is not a primary driver for DAX 30 companies, as the informational penetration by analysts is much higher for these large firms.
- Quote paper
- David Wagener (Author), 2009, Share Buybacks, Munich, GRIN Verlag, https://www.grin.com/document/142579
