If the purpose of equity buyback is to more efficiently allocate capital, then individual companies executing equity buyback are doing so because can no longer make efficient use of capital by using it to fuel additional growth and higher returns.
If that's the case, then equity buyback is tantamount to admitting that the company has no future potential for growth. As a company's stock price reflects expected value from future growth, a buyback should therefore trigger a drop in the stock price.
But it usually doesn't, usually buybacks trigger increases in the stock price as fewer shares remain in circulation in the public market and the company improves executive flexibility by consolidating control, and as investors expect to be paid a premium over market price through the buyback program.
Why? Because private players don't care about macro performance metrics. Buybacks have nothing to do with what may or may not be the best allocation of capital in the market.
The stock price doesn't reflect growth at least not directly. The price reflects expectation of future earnings. If the company is never going to grow but makes stable 1M per year in profit then that company is worth something. Let's say it's worth around 16M as that's around the break even point at which people prefer to have cash over company stock. If now that company uses 1M in yearly profit to buy back shares it's still worth 16M but every individual outstanding share is worth more as it now represents bigger part of the same pie. Therefore after the buyback the share price should increase. We can also say by exactly how much (barring any other new information).
This is finance 101 really. Buybacks are just more tax efficient because they are not taxed at the time of the buyback but at the time the stock holders sell.
The company (therefore remaining shareholders) no longer has that $1M that they spent on the buyback, meaning the total pie is actually smaller as well as having fewer shares/slices outstanding.
Yes, what dividends have to do with it? The company has value no matter if it pays the dividends or not. Controlling it has value for example as it may be worth something when bought by another company. You can also always dissolve it and pay the cash back to shareholders or you can buy back the stock which is a form of dividend (one when you're automatically reinvesting into the company stock).
If that's the case, then equity buyback is tantamount to admitting that the company has no future potential for growth. As a company's stock price reflects expected value from future growth, a buyback should therefore trigger a drop in the stock price.
But it usually doesn't, usually buybacks trigger increases in the stock price as fewer shares remain in circulation in the public market and the company improves executive flexibility by consolidating control, and as investors expect to be paid a premium over market price through the buyback program.
Why? Because private players don't care about macro performance metrics. Buybacks have nothing to do with what may or may not be the best allocation of capital in the market.