28 May 2015

Financial Times: Will share buyback craze spread to Europe?

The article analyses whether share buybacks’ popularity will spread across the Atlantic — and whether that would be good or bad news for Europe’s capital markets, beyond short-term share price increases.

There are many reasons why Europe will behave differently, however. Most obviously, executive remuneration is less likely to be linked to earnings per share — a performance measure easily manipulated by buybacks. So the immediate incentives will be lower. US companies have also issued domestic debt to finance buybacks rather than incurring hefty tax bills by repatriating excess cash held overseas — which has not been an obvious trend in Europe. Tax systems are also different.

European companies may be more willing to adjust dividend payments. They might also worry about future refinancing risks and credit rating downgrades if they issue more debt. US companies worry less about returning cash to shareholders now — and then tapping them for capital again when circumstances change.

Full article on Financial Times (subscription required)

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