- Treasury stock
A treasury stock or reacquired stock is
stockwhich is bought back by the issuing company, reducing the amount of outstanding stockon the open market ("open market" including insiders' holdings).
Stock repurchases are often used as a tax-efficient method to put cash into shareholders' hands, rather than pay
dividends. Sometimes, companies do this when they feel that their stock is undervalued on the open market. Other times, companies do this to provide a "bonus" to incentive compensation plans for employees. Rather than receive cash, recipients receive an asset that might appreciate in value faster than cash saved in a bank account. Another motive for stock repurchase is to protect the company against a takeover threat.
United Kingdomequivalent of treasury stock as used in the United States is treasury share. Treasury stocks in the UK refers to government bonds or gilts. "
Limitations of treasury stock
* Treasury stock does not pay a
* 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 pre-emptive rights as a shareholder, to receive cash dividends, or to receive assets on company liquidation. Treasury shares are essentially the same as unissued capital and no one advocates classifying unissued share capital 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
In an efficient market, a company buying back its stock should have no effect at all on its stock price. If the market fairly prices a company's shares at $50/share, and the company buys back 100 shares for $5000, it now has $5000 less cash but there are 100 fewer shares outstanding; the net effect should be that the value per share is unchanged. However, buying back shares does improve certain per-share ratios, such as price/earnings (
earnings per shareis increased due to fewer shares outstanding), but since the market risk increases by the same amount, the share value remains unchanged.
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.
One other reason for a company to buy back its own stock is to reward holders of
stock options. 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 underpriced); if so, option holders benefit. A dividend payment short term "always" decreases the value of shares after the payment, so, on the day shares go ex-dividend, option holders "always" lose. Finally, if the sellers into a corporate buyback are actually the option holders themselves, they may directly benefit from temporarily unrealistically favorable pricing.
The company can either retire 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. To see this, note that 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
balance sheet, treasury stock is listed under shareholder equityas a negative number. The accounts may be called equity reduction or contra-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 more or less than the initial cost respectively.
Another common way for accounting for treasury stock is the
par valuemethod. 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. 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. In auditing financial statements, 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.
According to SEC
Broker-dealerper Day: The company repurchasing shares may not use more than one brokeror dealerto acquire the shares per each day.
*Timing of Purchase: A repurchase may not be the first trade of the day. Repurchases may not be made in the last ten minutes of the trading day. These rules do not apply to over-the-counter
*Purchase Price: A repurchase may not be bid at a price higher than the highest independent
bidor last price of the last trade.
*Volume: Repurchases per day may not exceed 25% of the average daily volume of the previous 4 calendar weeks. Block purchases not effected by a broker-dealer are excluded from this restriction.
United Kingdom regulations
In the UK, the
Companies Act of 1955disallowed companies from holding their own shares. However, the Companies Act of 1993later repealed this.
List of finance topics
* [http://www.stockinvestingx.com/buybacks-repurchases.php Stock Buyback Database]
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Look at other dictionaries:
treasury stock — see stock Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. treasury stock n … Law dictionary
Treasury stock — Treas ur*y stock (Finance) Issued stock of an incorporated company held by the company itself. [Webster 1913 Suppl.] … The Collaborative International Dictionary of English
treasury stock — ☆ treasury stock n. shares of issued stock reacquired by the issuing corporation and held by it … English World dictionary
Treasury stock — Common stock that has been repurchased by the company and held in the company s treasury. The New York Times Financial Glossary common stock that has been repurchased by the company and held in the company s treasury. Bloomberg Financial… … Financial and business terms
treasury stock — The name for shares of a corporation s stock that were issued and then subsequently repurchased by the corporation. American Banker Glossary Previously issued stock that has been repurchased by, or donated to, or otherwise reacquired by the… … Financial and business terms
treasury stock — noun stock that has been bought back by the issuing corporation and is available for retirement or resale; it is issued but not outstanding; it cannot vote and pays no dividends • Syn: ↑treasury shares, ↑reacquired stock • Hypernyms: ↑stock * * * … Useful english dictionary
treasury stock — 1. *Common stock issued by a corporation and subsequently repurchased. See also *Treasury bond. 2. The British equivalent of a *Treasury bond (definition 1 only) … Auditor's dictionary
treasury stock — Same as treasury shares … Ballentine's law dictionary
treasury stock — noun Date: 1901 issued stock reacquired by a corporation and held as an asset … New Collegiate Dictionary
treasury stock — outstanding shares of stock reacquired and held by the issuing corporation. [1900 05, Amer.] * * * … Universalium