Why do companies buy back their shares?

The main reason companies buy back their own shares is to switch cash from mature sectors and investments to new sectors or expanding companies. Share buybacks are an increasingly frequent and healthy phenomenon. When there are no investment opportunities offering a return commensurate with the required rate of return, management returns cash to shareholders, who, presumably, can find investments that meet their requirements. Here we are reminded of M. Jensen's theory of free cash flow: when a company buys back its own shares, at least it is not undertaking a risky diversification or massively over-investing!

Shareholders and management can have other reasons for wanting to buy back shares: