Wednesday, September 28, 2011

Berkshire Hathaway to buy back shares

This story is a few days old, but Berkshire Hathaway is planning to start a share buyback.  This is pretty big news in that the company has never distributed cash to shareholders before.  Warren Buffet claims that the stock is significantly undervalued.  If this is so, then the buy back probably makes sense.  The evidence on buy backs is a little mixed, but in general there it supports the view that firms that do buy backs usually do so when their stock is undervalued.  We know this from two observations.  First buyback announcements are usually greeted with a positive stock price reaction, and second, valuation models show that firms that commence buybacks are, on average, undervalued compared to other firms.