1) It tends to improve the company’s valuation parameters\rWhen a company does a share buyback and extinguishes the shares, the number of outstanding shares reduces. With a lower number of shares, the company’s Earnings Per Share (EPS) and the Return on Equity (ROE) will improve. When the company’s EPS increases and the market gives the same price to earnings (P/E) multiple, the share price will go up.\r\r2) It may signal that the company’s share price is undervalued\rWhenever the overall market undergoes a big fall, cash-rich companies may announce a share buyback. Similarly, when a company’s share price falls significantly due to a particular short-term event, it may announce a share buyback. During such instances, the management signals to the shareholders and the overall market that the company share price is undervalued. It’s an indication that the management is confident about the company’s future prospects.\r\r3) It allows promoters to increase their stake and fend off hostile takeovers\rIn some cases, where the promoter shareholding is low, the company may announce a share buyback to shore up the promoters’ stake. During such buybacks, the promoters do not participate. When other shareholders offer their shares in the buyback, the promoters’ holding automatically goes up. With a higher stake, promoters can fend off any hostile takeover attempts.\r\r4) It is a way to return excess cash to shareholders\rShare buybacks are one of the ways of rewarding shareholders (along with other ways, such as dividends). Debt-free companies with high cash reserves announce buybacks when the management feels the cash flow from operations can take care of funding requirements for future investments. Rather than carrying high cash on the books, the company returns the excess cash to shareholders through share buybacks.