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A treasury stock or reacquired stock is
stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities i ...
which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings). Stock repurchases are used as a tax efficient method to put cash into shareholders' hands, rather than paying
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
s, in jurisdictions that treat
capital gains Capital gain is an economic concept defined as the profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting, is an income distributed to the ownership , owner in a Profit (economics) , profitable market p ...
more favorably. Sometimes, companies repurchase their stock when they feel that it is undervalued on the open market. Other times, companies repurchase their stock to reduce dilution from incentive compensation plans for employees. Another reason for stock repurchase is to protect the company against a takeover threat.Robert T. Sprouse, "Accounting for treasury stock transactions: Prevailing practices and new statutory provisions." ''Columbia Law Review'' 59.6 (1959): 882-900
online
/ref> The United Kingdom equivalent of treasury stock as used in the United States is treasury share. Treasury stocks in the UK refers to government bonds or
gilts Gilt-edged securities are bonds issued by the UK Government. The term is of British British may refer to: Peoples, culture, and language * British people, nationals or natives of the United Kingdom, British Overseas Territories, and Crown Depe ...
.


Limitations of treasury stock

*Treasury stock is not entitled to receive a
dividend A dividend is a distribution of profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit ...

dividend
*Treasury stock has no voting rights *Total treasury stock can not exceed the maximum proportion of total capitalization specified by law in the relevant country When shares are repurchased, they may either be canceled or held for reissue. If not canceled, such shares are referred to as treasury shares. Technically, a repurchased share is a company's own share that has been bought back after having been issued and fully paid. The possession of treasury shares does not give the company the right to vote, to exercise preemptive rights as a shareholder, to receive cash dividends, or to receive assets on company liquidation. Treasury shares are essentially the same as unissued capital, which is not classified as an asset on the balance sheet, as an asset should have probable future economic benefits. Treasury shares simply reduce ordinary share capital.


Buying back shares


Benefits

In an
efficient market The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis ...
, a company buying back its stock should have no effect on its price per share valuation. If the market fairly prices a company's shares at $50/share, and the company buys back 100 shares for $5,000, it now has $5,000 less cash but there are 100 fewer shares outstanding; the net effect should be that the underlying value of each share is unchanged. Additionally, buying back shares will improve price/earnings ratios due to the reduced number of shares (and unchanged earnings) and improve
earnings per share Earnings per share (EPS) is the monetary value of earningsEarnings are the net benefits of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single ...

earnings per share
ratios due to fewer shares outstanding (and unchanged earnings). If the market is not efficient, the company's shares may be underpriced. In that case a company can benefit its other shareholders by buying back shares. If a company's shares are overpriced, then a company is actually hurting its remaining shareholders by buying back stock.


Incentives

One other reason for a company to buy back its own stock is to reward holders of
stock options In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
. Call option holders are hurt by dividend payments, since, typically, they are not eligible to receive them. A share buyback program ''may'' increase the value of remaining shares (if the buyback is executed when shares are under-priced); if so, call option holders benefit. A dividend payment short term ''always'' decreases the value of shares after the payment, so, for stocks with regularly scheduled dividends, on the day shares go ex-dividend, call option holders ''always'' lose whereas put option holders benefit. This does not apply to unscheduled (special) dividends since the strike prices of options are typically adjusted to reflect the amount of the special dividend. Finally, if the sellers into a corporate buyback are actually the call option holders themselves, they may directly benefit from temporary unrealistically favorable pricing.


After buyback

The company can either retire (cancel) the shares (however, retired shares are not listed as treasury stock on the company's financial statements) or hold the shares for later resale. Buying back stock reduces the number of outstanding shares. Accompanying the decrease in the number of shares outstanding is a reduction in company assets, in particular, cash assets, which are used to buy back shares.


Accounting for treasury stock

On the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
, treasury stock is listed under
shareholders' equity In finance, equity is ownership of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce posi ...
as a negative number. It is commonly called "treasury stock" or "equity reduction". That is, treasury stock is a
contra account Debits and credits in double entry bookkeeping are entries made in account ledger A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, would record tr ...
to shareholders' equity. One way of accounting for treasury stock is with the cost method. In this method, the paid-in capital account is reduced in the balance sheet when the treasury stock is bought. When the treasury stock is sold back on the open market, the paid-in capital is either debited or credited if it is sold for less or more than the initial cost respectively. Another common way for accounting for treasury stock is the
par value Par value, in finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were ampu ...
method. In the par value method, when the stock is purchased back from the market, the books will reflect the action as a retirement of the shares. Therefore, common stock is debited and treasury stock is credited. However, when the treasury stock is resold back to the market the entry in the books will be the same as the cost method. In either method, any transaction involving treasury stock cannot increase the amount of
retained earnings The retained earnings (also known as plowback) of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by priva ...
. If the treasury stock is sold for more than cost, then the paid-in capital treasury stock is the account that is increased, not
retained earnings The retained earnings (also known as plowback) of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by priva ...
. In auditing
financial statements Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
, it is a common practice to check for this error to detect possible attempts to "cook the books".


United States regulations

In the United States, buybacks are covered by multiple laws under the auspices of the
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agencies of the United States government, independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary ...
.


United Kingdom regulations

In the UK, the Companies Act 1955 disallowed companies from holding their own shares. However, the
Companies Act 1985 The Companies Act 1985 (c.6) is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their di ...
later repealed this.


See also

*
List of finance topics The following outline is provided as an overview of and topical guide to finance: Finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation a ...
*
List of accounting topics This page is an index of accounting topics. {{AlphanumericTOC, align=center, nobreak=, numbers=, references=, externallinks=, top=} A Accounting ethics - Accounting information system An accounting as an information system (AIS) is a ...
*
Shares authorized The authorised capital of a company (sometimes referred to as the authorised share capital, registered capital or nominal capital, particularly in the United States) is the maximum amount of share capital that the company is authorised by its consti ...
*
Shares issued In financial markets A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the securities include stocks and Bo ...
*
Shares outstanding Shares outstanding are all the share Share may refer to: * Share, to make joint use of a resource (such as food, money, or space); see Sharing * Share (finance), a stock or other financial security (such as a mutual fund) * Share, Kwara, a town and ...
*
Share capital __NOTOC__ A corporation's share capitalGlossary on Trade Financing Terms - S
in the U ...
*
Public float In the context of stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed o ...
*
Shareholders' equity In finance, equity is ownership of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce posi ...


Notes


Further reading

* Cho, Sung Ick. "Treasury Stock Sales and Management Rights Protection: Conflicts of Interest between an Owner-manager and Small Shareholders." ''KDI Journal of Economic Policy'' 39.3 (2017): 63-98
online
* Xia, Belle Selene, Elia Liitiäinen, and Ignace De Beelde. "Accounting conservatism, financial reporting and stock returns." ''Accounting and Management Information Systems'' 18.1 (2019): 5-24
online
{{Authority control Balance sheet Stock market terminology Corporate finance he:הון מניות#הון מניות רדומות