Share Buyback: A Risky Endeavour

In a buyback programme the excess cash flows are distributed among the shareholders by purchasing own shares generally at a premium. The most common reason for this repurchase is that to disclose to the shareholders the confidence level of companies. The impact of Buyback on share price comes from changes in a company's capital structure and more critically, from the signals a buyback sends. But sometimes this signal can be negative as investors can perceive that the management team sees few investment opportunities ahead, suggesting to investors that they could do better by putting their money elsewhere. So this signal can be risky for the company which has gone for buyback. This paper focuses on the risk aspect associated with buyback of shares which directly reduces equity in the firm's capital structure. Buyback may also lead to abnormal increase of prices posing heavy risk to those who value shares based on fundamentals. This may also lead to reduction in investors' interests in the market particularly with de-listing o f good shares.