SHARES, STOCK SPLIT, DIVIDENDS

Jun 18th, 2015
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Share repurchases is an alternative to cash dividend. It involves a firm buying back shares from its existing shareholders. Share repurchases convey management’s expectation of future increases in the firm’s earnings and cash flow- optimism about the future value of the stock that is not shared by the financial market.

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Why do share repurchases announcements elicit positive stock market reaction?Share repurchases is an alternative to cash dividend. It involves a firm buying back shares from its existing shareholders. Share repurchases convey managements expectation of future increases in the firms earnings and cash flow- optimism about the future value of the stock that is not shared by the financial market. This will result investors to buy the shares of the firm thereby bidding up the shares price upon the announcement of the repurchases. Alternatively, there is a signaling that the firms shares are undervalued which cause the stock market to react by bidding up the price of the share at the announcement of the repurchases.Stock splits are said to be cosmetic events and yet investors react positively to stock split. Explain why stock splits are considered as cosmetic events and briefly discuss why the market reacts positively to such events.Stock splits refer to the issue of additional shares by a firm to its existing shareholders in proportion to their current holdings.Stock splits are said to be cosmetic events because the corporations cash flows are unaffected, each shareholder retains his proportionate ownership and the claims of other classes of security holders are unaltered.The market positively reaction to such events can be explained by the signaling hypothesis. According to the signaling hypothesis, managers declare stock splits to convey favorable in

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