Treasury Stock

Question: An account called treasury stock is often found near the bottom of the shareholders’ equity section of

the balance sheet. Treasury stock represents issued shares of a corporation’s own stock that have been reacquired.

For example, the December 31, 2008, balance sheet for Viacom Inc. reports a negative balance of nearly $6

billion identified as treasury stock.

A 2004 story in the Wall Street Journal indicated that Viacom had been buying and selling its own stock for

a number of years: “The $8 billion buyback program would enable the company to repurchase as much as

percent of its shares outstanding. The buyback follows a $3 billion stock-purchase program announced in 2002,

under which 40.7 million shares were purchased” (Flint, 2004).

Why does a company voluntarily give billions of dollars back to stockholders in order to repurchase its own

stock? That is a huge amount of money leaving the company. Why not invest these funds in inventory, buildings,

investments, research and development, and the like?

Why does a corporation buy back its own shares as treasury stock?

Answer: Numerous possible reasons exist to justify spending money to reacquire an entity’s own stock. Several of

these strategies are rather complicated and a more appropriate topic for an upper-level finance course. However,

an overview of a few of these should be helpful in understanding the rationale for such transactions.

• As a reward for service, businesses often give shares of their stock to key employees or sell them shares at a

relatively low price. In some states, using unissued shares for such purposes can be restricted legally. The

same rules do not apply to shares that have been reacquired. Thus, a corporation might acquire treasury

shares to have available as needed for compensation purposes.