Stock repurchases are most commonly interpreted by investors as a signal that:
A) future repurchases will be forthcoming.
B) the firm's shares are underpriced.
C) the firm has an increasing number of positive-NPV opportunities.
D)stock repurchases will gradually replace the stock dividends.

Question

Quizplus · Accepted Answer

Stock repurchases can be a signal that the firm's shares are undervalued. If management believes that the current market price is below the true value of the shares, then repurchasing them can create value for shareholders. This interpretation is based on the idea of the "signaling effect" of stock repurchases, where the action itself sends a message to the market about the company's confidence in its future prospects.

Stock Repurchases Are Most Commonly Interpreted by Investors as a Signal