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Use the demand supply model of asset markets to explain the effect of corporate buy-backs. That...

Use the demand supply model of asset markets to explain the effect of corporate buy-backs. That
is, explain what the model implies will be the consequences when a corporation buys-back some of its own outstanding stock. Taking a longer-run view, who are the main winners and losers?

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Answer #1

Answer: Stock buybacks benefits shareholders, because the earnings of the company are reinvested towards purchasing stock, thereby creating less supply of the stock in the market and driving up the price. This increases demand because there is now less stock of the company available, and the market is force to adjust the price upward because there is a shortage of the stock.

Stock buybacks more or less hurt the management of the company itself and the company as a whole, because instead of reinvesting money in operations or product development, the company decreases its bottom line and sends that money directly to stockholders, pocketing stock that it will just have to hold onto for no benefit at all.

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