Share Buybacks have become commonplace in the business world. In 1999 alone, 1,253 companies on the New York Stock Exchange repurchased their own shares, spending an estimated $181 billion—nearly as much as the $216 billion that NYSE companies distributed as dividends during that year. On the face of it, the popularity of buybacks is easy to understand. By purchasing its own stock, a company reduces the number of shares outstanding without affecting its reported earnings. That increases the company’s earnings per share and, so the argument goes, the price of a share should rise accordingly. And in most cases, buybacks seem to pay off: historically, companies that bought back their own shares have posted immediate returns between two and 12 percentage points above the market average, representing billions of dollars in shareholder value.
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A version of this article appeared in theApril 2001issue of Harvard Business Review.
Read more on Accounting or related topics Financial markets and Finance and investing