Jason Mitchell

Motivations of Australian listed companies effecting share buy-backs

The bulk of prior research on share buy-backs has been undertaken in the U.S. As the legislative environment and capital market perception of buy-backs in Australia are different to the U.S., it is both desirable and necessary to examine the motivations of Australian share buy-backs. Contemporary Australian financial press reports, the U.S. financial management literature and anecdotal evidence provide numerous feasible motivations for a company to undertake a buy-back. In an Australian context, this article considers the following: (a) the development of the legislative framework relating to share buy-backs and why some forms of buy-back are preferred over others; (b) a set of potential motivations (reasons) for Australian companies undertaking a buy-back; and (c) the actual motivations as provided in ASX announcements by forty-four listed companies effecting sixty-seven share buy-backs over the period 1990 to 1995. Results reveal that motivations differ depending on the type of buy-back and are reasonably consistent across time. The two prime motivations for on-market buy-backs are: (a) signalling of future expectations (underpricing), and (b) an attempt to increase financial performance (EPS) and/or position (NAB/share). For selective buy-backs, the main purpose is to remove specific shareholders from the share register. Employee buy-backs are generally seen as an off-market means of providing a market for the company’s shares. Finally, the overriding motivation for equal access buy-backs is as an alternative to dividends.