Are Stock Buybacks a Signal?

The short answer

A stock buyback, or share repurchase, is when a company uses its cash to buy its own shares. Buybacks can signal that management thinks the stock is undervalued, and some well-known research found that stocks did better than expected in the years after buyback announcements, especially for cheaper “value” stocks. But a buyback announcement is only an authorization. The real information is in how much the company actually buys, at what prices, and what else it could have done with the money.

How a buyback works

Most U.S. companies buy back stock through open-market repurchases. The board of directors approves a program, often stated as a dollar amount such as “up to $10 billion,” and the company then buys shares on the stock market over months or years through a broker. Less common methods include tender offers, where the company offers to buy a fixed number of shares at a set price, and accelerated share repurchases arranged with a bank.

Repurchased shares are usually held as treasury stock or retired. Either way, fewer shares are outstanding, so each remaining share represents a slightly bigger slice of the company. Earnings per share can rise even if total profit is flat, simply because the profit is divided among fewer shares.

Authorization versus actual repurchases

This is the distinction that matters most for investors reading the news.

An authorization is permission from the board. It sets a ceiling, not a commitment, and companies can take years to use it, or never use all of it. Headlines usually report the authorization because it is the large, round number in the press release.

An actual repurchase is money spent. Public companies report it in their quarterly (10-Q) and annual (10-K) filings. Under Item 703 of Regulation S-K, they disclose a table showing, for each month of the quarter, the number of shares bought, the average price paid, and how much remains under the authorization. The cash flow statement also shows total spending on repurchases.

In 2023 the SEC adopted rules that would have required companies to disclose daily repurchase data and to explain the reasons for their buybacks. The U.S. Court of Appeals for the Fifth Circuit vacated those rules on December 19, 2023, so the older monthly Item 703 table remains the main disclosure.

When you see a buyback headline, look up the next 10-Q and check how many shares the company actually bought. WallStPal’s buyback page tracks announced programs and reported repurchases.

Rule 10b-18: the safe harbor

A company buying its own stock could, in principle, be accused of propping up the price. SEC Rule 10b-18 gives companies a “safe harbor,” a set of conditions that, if met every day, protect them from being charged with market manipulation based on the manner, timing, price and volume of their purchases. The conditions, as set out in 17 CFR 240.10b-18:

• Manner. Purchases on any single day go through one broker or dealer.
• Timing. The company cannot make the opening purchase of the day, and must stop before the close: 10 minutes before for actively traded stocks (at least $1 million in average daily trading volume and a public float of at least $150 million), 30 minutes before for others.
• Price. The company cannot pay more than the highest independent bid or the last independent trade price, whichever is higher.
• Volume. Daily purchases cannot exceed 25% of the stock’s average daily trading volume, with an exception allowing one block purchase per week.

Using the safe harbor is voluntary. Failing to meet it does not create a presumption of manipulation, and complying with it does not protect a company from insider trading claims. Companies that want to keep buying during blackout periods, when they have inside information, often use a Rule 10b5-1 plan set up in advance. Our guide to 10b5-1 trading plans explains how those plans work.

The 1% excise tax

The Inflation Reduction Act of 2022 added Section 4501 to the Internal Revenue Code. It imposes an excise tax equal to 1% of the fair market value of stock a publicly traded U.S. corporation repurchases during its taxable year. It applies to repurchases after December 31, 2022.

Key features, according to the statute:

• The amount subject to tax is reduced by the fair market value of stock the company issues during the year, including stock given to employees. This is called the netting rule.
• Companies that repurchase $1 million or less in a year owe nothing.
• Exceptions include repurchases contributed to employee retirement plans and repurchases by regulated investment companies and real estate investment trusts.

The company pays the tax, not shareholders. It is reported to the IRS on Form 720, with Form 7208 used to calculate the amount. The Treasury and IRS issued final regulations in 2024 and 2025.

What research says

The study cited most often is David Ikenberry, Josef Lakonishok and Theo Vermaelen, “Market Underreaction to Open Market Share Repurchases” (Journal of Financial Economics, 1995). Looking at open-market repurchase announcements from 1980 to 1990, they found:

• The average abnormal four-year buy-and-hold return after an announcement was 12.1%.
• For “value” stocks, which the authors described as “companies more likely to be repurchasing shares because of undervaluation,” the average abnormal return was 45.3%.
• For “glamour” stocks, where undervaluation was less likely to be the motive, “no positive drift in abnormal returns is observed.”

The interpretation the authors offered is that the market tends to underreact to buyback announcements, especially when a company is cheap. The study covers a period before buybacks became as common as they are today, and results from one decade do not guarantee anything about another.

A survey of 384 financial executives by Alon Brav, John Graham, Campbell Harvey and Roni Michaely, published as “Payout Policy in the 21st Century” (Journal of Financial Economics, 2005), found that “managers like to repurchase shares when they feel their stock is undervalued and in an effort to affect EPS.” Both motives exist, and they do not mean the same thing for shareholders.

When a buyback says more, and when it says less

A buyback may carry more information when:

• The company actually spends heavily relative to its size, as shown in its filings.
• It buys after a share price decline, rather than mainly at highs.
• The share count falls over time, rather than staying flat.
• Insiders are also buying with their own money. See is insider buying a good signal.

A buyback may carry less information when:

• Repurchases mostly offset new shares issued to employees. In that case the share count barely moves.
• The company borrows to fund buybacks while its business weakens.
• The authorization is large but spending is small.

Comparing buybacks with dividends, the other main way to return cash, is covered in dividends vs. buybacks.

Examples

Apple, 2024. On May 2, 2024, Apple’s board authorized an additional $110 billion in share repurchases, described by Bloomberg as the biggest U.S. buyback authorization ever, topping Apple’s own $100 billion authorization in 2018, according to BNN Bloomberg. The actual spending shows up in the filings. Apple’s 10-Q for the quarter ended June 29, 2024 reported that in the first nine months of its fiscal year it repurchased 387 million shares for $70.0 billion.

Berkshire Hathaway, 2018 and 2024. In July 2018 Berkshire changed its buyback policy so that Warren Buffett and Charlie Munger could repurchase shares whenever both believed the price was below Berkshire’s intrinsic value, replacing a cap tied to 120% of book value, as Reuters reported. The policy gave permission but no schedule. Berkshire’s 10-Q for the quarter ended September 30, 2024 shows repurchases of about $2.6 billion in the first quarter of 2024, $345 million in the second, and none in the third. For investors who follow Berkshire, the pause itself became news.

Explain it like I’m 13

Imagine a pizza cut into 10 slices, owned by 10 friends. If the pizza shop buys back two slices from friends who want to sell, there are now only 8 slices left in the group, and each remaining slice is a bigger share of the same pizza.

A shop that announces “we might buy back up to five slices” has not bought anything yet. You only know it meant it when slices actually disappear. And if the shop only buys back slices when it thinks they are cheap, that tells you something about what the shop thinks the pizza is worth.

Where the rule comes from

• SEC Rule 10b-18, 17 CFR 240.10b-18 (via Cornell LII).
• Internal Revenue Code Section 4501, excise tax on repurchase of corporate stock.
• Federal Register, Excise Tax on Repurchase of Corporate Stock, final regulations (November 2025).
• Ikenberry, Lakonishok and Vermaelen, abstract on RePEc.
• Brav, Graham, Harvey and Michaely, NBER Working Paper 9657.

This guide explains public filings and research. It is not investment advice.

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