In theory, management’s decision to buy back a company’s stock should boost the share price. After all, a buyback means fewer shares of stock on the market and higher earnings per share, both of which should lead to a higher stock price.

However, it appears that the theory doesn’t hold up in real life. In 2007, Standard & Poor’s studied the 423 companies from the S&P 500 that had completed share repurchases in the preceding 18 months, as outlined in this BusinessWeek article. The researchers found that share buybacks didn’t boost stock prices, nor did they significantly reduce the number of shares outstanding. While a study covering a longer time period may be warranted, the findings should at least give supporters of share buybacks pause.

Another study, this one from Financial Executive, found that while EPS rose during the 3 years after companies instituted buybacks, earnings per share increased even more at companies that didn’t buy back shares.

What’s more, a 2008 report by Audit Integrity, an independent research firm, found that companies that take an aggressive approach to accounting are more likely to engage in buybacks. Aggressive accounting refers to techniques, whether legal or not, that management may be using to make their numbers look better, says Jack Zwingli, president and chief executive officer with Audit Integrity. Examples include accelerating the recognition of revenue or delaying the recognition of expenses.

Given that the relationship between stock buyback programs and rising share prices is unclear, why do companies engage in them? If there’s extra cash available, management has several other options: They can reinvest in the business, acquire another company, issue a special dividend, or simply bank the money, Zwingli notes. “Of all those, the one that benefits management the most is share repurchases,” he adds.

While that sounds cynical, consider compensation plans in which management’s incentive compensation is tied to earnings per share. A stock buyback is one way to boost EPS. To be sure, in this case, it’s risen only because shares were repurchased, rather than a result of management’s leadership and action.

Moreover, given that the tax rates on many dividends and long-term capital gains are the same, most investors have no reason to prefer a share repurchase over a dividend, adds Len Rosenthal, Ph.D., a professor of finance at Bentley University in Waltham, Mass. In fact, most probably would prefer cash in hand from dividends, he says.

While share repurchase decisions usually are made by the CEO, CFO, and board of directors, treasurers clearly have a role to play, Zwingli says. For starters, they should objectively assess whether the company’s cash position can cover a repurchase program. In addition, “they should speak up and ask the basic question, ‘Is this the best use of shareholders’ money?,’’’ he says. Judging from the research, in many cases, the answer will be “no.” ###