The following is my answer to a Quora
question: “Why
are share buyback programmes legal? Why
not invest in growth or give out dividends?”
In a functioning secular legal system,
everything is assumed to be legal unless there is specific reasons for it to be
otherwise. And that reason has to be
based on ethics, or the public good. How
would share buybacks be contrary to either?
We can argue that a share buyback is also a means to secure growth by
shoring up the stock. It also helps the
management to consolidate control, and gives some form of protection against
speculation. Also, the existing
shareholders gain due to the rise in share prices. This makes more sense than paying out a flat
dividend, especially in places where there is a capital gains tax, such as the
US.
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