Repurchasing Stocks and its Negative Effects

Repurchasing Stock
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Repurchasing Stock
Common and preferred stocks form part of the stockholders’ equity. When a company buys back its shares, a treasury stock account is created to hold the repurchased stock. The line item ‘treasury stock’ comes after common and/or preferred stock and retained earnings under the shareholders’ equity sub-title in the balance sheet. Thus, the total shareholders’ equity is calculated by adding common and preferred stocks to retained earnings and subtracting treasury stock.
One of the reasons a company may repurchase its stock is to pre-empt a hostile takeover. By buying back its shares, the value of existing shareholders improves since there is a reduction in the numerical value of shares. With such an increase in value, the shareholders gain a stronger controlling interest in the company, sufficient enough to wade ...