Accelerated Share Repurchase
Encyclopedia
Accelerated share repurchase (ASR) refers to a method that publicly traded companies may use to buy back shares of its stock
from the market
.
The ASR method involves the company buying its shares from an investment bank (who in turn borrowed them from their clients), and paying cash to the investment bank while entering into a forward contract
. The investment bank will then seek to purchase shares of the company from the market to return to its clients. At the end of the transaction, the company may receive even more shares than it initially received, which are then retired. This method can be contrasted with a typical open market repurchase, where the company simply announces that it is repurchasing shares on the market, and then does so.
A firm might choose the ASR method as a way of reducing the number of shares outstanding for a fixed cost, transferring the risk to the investment bank (which is now short the stock) for a negotiated premium.
By purchasing the shares in this way, it immediately exchanges a fixed amount of money for shares of its stock. It is currently being theorized that such arrangements are used by management to manipulate earnings figures for incentive compensation
and reporting reasons.
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
from the market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
.
The ASR method involves the company buying its shares from an investment bank (who in turn borrowed them from their clients), and paying cash to the investment bank while entering into a forward contract
Forward contract
In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a...
. The investment bank will then seek to purchase shares of the company from the market to return to its clients. At the end of the transaction, the company may receive even more shares than it initially received, which are then retired. This method can be contrasted with a typical open market repurchase, where the company simply announces that it is repurchasing shares on the market, and then does so.
A firm might choose the ASR method as a way of reducing the number of shares outstanding for a fixed cost, transferring the risk to the investment bank (which is now short the stock) for a negotiated premium.
By purchasing the shares in this way, it immediately exchanges a fixed amount of money for shares of its stock. It is currently being theorized that such arrangements are used by management to manipulate earnings figures for incentive compensation
Incentive
In economics and sociology, an incentive is any factor that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way...
and reporting reasons.