Saturday, August 4, 2018

Stock Buybacks and Executives Enriching Themselves

You all recall that rather than spend the money from their Trump tax cuts on raising salaries or new investments, many American companies used them for stock buybacks. Stock buybacks generally enrich stockholders, but some new research shows that some executives use them as a crass way to enrich themselves:
We dove into the data, studying 385 buybacks over the last fifteen months….First, we found that a buyback announcement leads to a big jump in stock price….That’s unsurprising….What did surprise us, however, was how commonplace it is for executives to use buybacks as a chance to cash out. In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement….In the process, executives take a lot of cash off the table. On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase. Thus, executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement.
So there you have it: that corporate tax cut went right into the pockets of executives and other big stockholders.

4 comments:

Shadow said...

Yes, but since it's the month after the announcement --after disclosure has been made -- so can any other owner of the stock. Not much use to someone owning a 100 shares, but perhaps of great use to mutual funds and pension funds that can own hundreds of thousands to millions of shares of a company's stock.

G. Verloren said...

The issue is that the people running the company decide to make a decision which allows them to personally profit at the direct expense of the company they are running.

It's a conflict of interests. It's like if the president uses his powers to enrich himself, or if a lawmaker changes the laws to decriminalize their own behavior. It's corruption of the basest sort.

Shadow said...

Executives are certainly in a position to do it., but It's more what raiders like T. Boone Pickens used to do and hedge fund managers still do. They are the ones most likely to bleed a company dry and then leave. And if you are going to keep issuing stock to your employees 401(k)'s, then you pretty much have to buy back stock now and then.

G. Verloren said...

Yes, but that can also be an excuse for executives enriching themselves.

Sure, every now and again you need to buy back stock. But maybe when that happens, the company should have a rule about executives not being able to sell their stock back to the company during that period? Ya know, to prevent the conflict of interest thing...