Can a Firms Last Resort Be Its Stock Prices Best Option?
In response to this summer’s subprime mortgage crisis, the Federal Reserve pumped more than $38 billion into the U.S. banking system to help shore up financial markets. The agency also played a similar role after the September 11 terrorist attacks. Because the Fed and other central banks often have a hand in such bailouts, they are frequently referred to as lenders of last resort. Not every market shock is worthy of the Fed’s involvement, however. In cases where individual stocks become undervalued, can firms act as “buyers of last resort” to boost their own stock prices? Professor Jialin Yu recently examined this question and found that firms with the ability to repurchase their own shares can indeed have an impact on their stock prices. “Firms often buy back their own shares after market shocks in the hope of making money,” Yu says. “Repurchasing also signals to the market that a company has confidence in its own value.” The overall impact of repurchasing on a company’s stock price a
