Share Buybacks - Technical Question
Can anyone provide the intuition behind what they're explaining with regards to share buybacks and the impact on the share price? More specifically what equation is being referenced.
For example, cash-rich but otherwise risky companies could see artificially low share prices if investors are discounting that cash. In this case, a buyback should lead to a higher share price, as the upward share price impact of a lower denominator is greater than the downward share price impact of a lower equity value numerator. Conversely, if shareholders view the buyback as a signal that the company’s investment prospects aren’t great (otherwise, why not pump the cash into investments?), the denominator impact will be more than offset by a lower equity value (due to lower cash AND lower perceived growth and investment prospects).
I think if you're ever asked what happens to the share price when a company undergoes buybacks you should answer "it depends". In some circumstances stock buy backs would increase demand for the stock and drive the share price up. On the other hand, the fact that the company is not using the cash for 1. M&A activity 2. CapEx then it's clear the company does not no the next steps to grow the company and shareholders could see this negatively and as a result lower demand.
Not sure if that answers the question, hope it helps though.
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