Share Repurchases Are Very Attractive Way Of Distributing The Profits Of The

Share repurchases are very attractive way of distributing the profits of the company because they could happen at any time of the year; investors try to put pressure on the company to choose a suitable time for most of them.
Share repurchases give investors the flexibility and the choice in participations, investors might choose to participate in the share repurchase if they feel that their overall tax liabilities will become less.
Investors could defer their tax payments to make their own decision of when to sell in order to maximize their total wealth.
Of course, shareholders can sell their shares in the market if they want cash as a tax
Advantaged substitute for either share repurchases or cash dividends.
In the law, the tax paid on capital gains is deferred until the shares are sold whereas any income tax on dividends is paid annually. The deferral of the capital gains tax reduces its present value.
Broadly speaking dividends in the UK enjoy a less favourable tax regime than share repurchases which may give rise to something of a Dividend Policy Puzzle.
Although dividends do not enjoy the same tax treatment that share repurchases have, most of the companies in the UK are still paying dividends because most of the investors are tax-exempt and companies listen to their shareholders in the UK.

This point will be researched in more detail in the coming sections

2.3 Financial Structure:

When companies decide to buyback their shares, they change their financial structure.
Share buyback is accompanied with significant debt/equity ratio.
Share repurchase does not only reduce equity but also increases debt.
The leverage ratio will increase after the buyback period.

The financial structure of the company has a profound impact on the payout policy.
In order to understand how the financial structure affects the payout policy we need to understand the concept pf block holders.
Block Holders are few numbers of investors who own the majority of the shares of the company.
The economic literature is increasingly enforcing the fact that block holders could play a positive role in monitoring the performance of the companies that they invest in because they have a big interest in preserving and growing the capital that they have invested.
Unlike small investors, block holders power is very important in keeping the management of the company doing the best it can in order to maximize the wealth of the shareholders.
When companies use share buyback, it is expected that minority shareholders will sell their shares to the issuing company and not the block holders.

When that happens, small shareholders numbers will decrease and there power will be less.
This will open the door for bloke shareholders to use their power in imposing what they want without listening to the minority shareholders who have less power in the board room than bloke shareholder.