The Repurchase of Common Stock
Summary
The reference has not verified this book in detail; the summary states only what the title, author and subject establish.
Charles Ellis and Allan Young wrote this early study of share repurchases in 1971, at a point when the practice was uncommon in American corporate finance and its economics were not well understood.
The book examines why companies buy their own shares, what the alternatives are, and how the decision should be analysed. The questions it addresses include the comparison between repurchase and dividend as means of distributing cash, the tax treatment of each, the effect on earnings per share and on remaining shareholders, the use of repurchases to fund employee stock plans and acquisitions, the signalling content of the announcement, and the legal and regulatory constraints then applying.
The reference has not verified this book in detail. Its historical interest is considerable, since it predates the 1982 rule change that made large open-market repurchases legally safe and thereby created the modern practice. Readers should note that the tax treatment, the regulatory framework and the scale of the activity have all changed beyond recognition since, and that the modern debate about buybacks, including Lazonick's critique, addresses a practice that barely existed when this was written.
Key takeaways 6
- Repurchases and dividends are alternative means of distributing cash and differ principally in their tax treatment and in their flexibility.
- A repurchase raises earnings per share arithmetically without changing the business, which is why the measure misleads when used alone.
- Repurchasing shares below intrinsic value transfers value to remaining shareholders and above it transfers value away from them.
- The announcement of a repurchase carries signalling content about management's view of the share price.
- The book predates the 1982 rule change that made large open-market repurchases legally safe and created the modern practice.
- The reference has not verified this book in detail, and the regulatory and tax context it describes no longer applies.
Who should read it
Readers interested in the historical treatment of share repurchases before the practice became widespread, with the caveat that this entry is not verified in detail.
About Charles D. Ellis
Founder of Greenwich Associates; chair of the Yale endowment investment committee; author of 'The Loser's Game'
His 1975 essay 'The Loser's Game' is the primary source that reframed active management as a negative-sum contest, and the argument is still cited verbatim.
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Where it sits in the reference 2
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