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The price of the share stays the same but there are fewer shares, so the market cap would go down.
by pliny 2y ago
The price of the share stays the same but there are fewer shares, so the market cap would go down.
- mrkstu 2y agoBut EPS rises so equilibrium would suggest the price of the share would almost certainly rise to match the old EPS.
- fiprofessor 2y agoThe earnings per share certainly increases. But this is (at least theoretically) offset by the fact that the firm's assets have decreased. For example, if the buyback was paid for with cash, then prior to the buyback, the shares represented a claim of ownership not just on future earnings, but also on that cash reserve. That said, this is all under a theoretical model (as in Miller-Modigliani theorem). In practice/empirically, there is reason to plausibly believe that e.g. the decision to announce a buyback has a signalling effect and so can increase share prices.
- User23 2y agoWell it certainly makes a market for the lucky duckies who are the counterparties for the buyback. They benefit.
- mrkstu 2y agoIs there a heuristic for how much of the value of a share is assigned to asset value vs forward looking earnings? Many of the ‘hot’ stocks like Nvidia seem almost all forward looking.
- pliny 2y agoFor public companies you don't need a heuristic, as the balance sheet is included in quarterly earnings reports.
- User23 2y agoThis isn’t even necessarily true for dividend yield let alone for EPS.