Treasury Stock

The main purpose of the company buying back treasury shares is to improve the company's operating efficiency, increase shareholders' interests, and adjust the market's assessment of the company's value. Specifically, treasury stocks have the following functions:

Returning shareholders: Treasury shares can be regarded as an indirect form of dividends, because buying back treasury shares can reduce the number of shares circulating in the market, thereby increasing earnings per share and net assets per share, which is reflected in the stock price and increases the value per share. . In addition, treasury shares have the advantage of saving tax burden compared to direct cash dividends.

Support stock price: Treasury shares can be used to stabilize or increase the company's stock price in the market, because buying back treasury shares can increase the demand for the company's shares in the market and reduce the pressure of oversupply, thereby supporting or pushing up the stock price. At the same time, treasury stocks can also be used as a signal that the company is confident in its performance and prospects and believes that its stocks are undervalued.

Adjust capital structure: Treasury shares can be used to adjust the company's capital structure, reduce capital costs, and improve capital efficiency. Because buying back treasury shares can reduce the company's equity capital and increase the company's debt capital, thus increasing the company's debt-to-equity ratio and reducing the company's cost of equity. At the same time, treasury shares can also reduce the company's cash outflow from future dividends or interest payments.

Providing employee benefits: Treasury shares can be used to provide employee benefits within the company, such as issuing employee options, employee subscription rights, employee stock ownership plans, etc. These benefits can motivate employees' work enthusiasm and loyalty, and enhance the alignment of interests between employees and the company.

Advantages and Disadvantages of Treasury Stocks

As a tool of corporate financial management, treasury shares have their advantages and disadvantages. The advantages of treasury stocks mainly include the following aspects:

Improve shareholder returns: Treasury stocks can increase earnings per share and net assets per share, increase the value of each share, thereby increasing shareholder returns. At the same time, treasury shares can also save tax burden, because treasury shares do not need to pay dividends, and dividends are subject to income tax in some countries or regions.

Improve market confidence: Treasury stocks can improve market confidence in the company, because treasury stocks indicate that the company has sufficient cash flow and profitability, and is confident in its performance and prospects. At the same time, treasury stocks can also resist negative news or speculation in the market and maintain the company's reputation and image.

Optimize capital structure: Treasury stocks can optimize the company's capital structure, reduce capital costs, and improve capital efficiency. Because treasury shares can reduce the company's equity capital and increase the company's debt capital, thus increasing the company's debt-to-equity ratio and reducing the company's cost of equity. At the same time, treasury shares can also reduce the company's cash outflow from future dividends or interest payments.

Motivating employee performance: Treasury shares can motivate employee performance because treasury shares can be used to provide benefits such as employee options, employee subscription rights, and employee stock ownership plans. These benefits allow employees to share in the company's growth and profits, enhancing the alignment of interests between employees and the company.

The shortcomings of treasury stocks mainly include the following aspects:

Impact on liquidity: Treasury shares will affect the liquidity in the market, because treasury shares will reduce the number of shares circulating in the market, thereby reducing the trading volume and frequency of transactions in the market. This may cause difficulty in buying and selling or price fluctuations in the market.

Increased debt risk: Treasury shares will increase the company's debt risk because treasury shares will increase the company's debt capital, thereby increasing the company's debt-to-equity ratio. This could make it difficult for the company to repay debt or make interest payments in the face of market volatility or declining performance.

Reduced voting rights: Treasury shares reduce voting rights because treasury shares do not have voting rights at shareholder meetings. This may make it difficult for the company to gain sufficient support or opposition when faced with major decisions or changes.