If share buybacks are supposed to be for the long-term benefit of the company, why do so many corporate insiders sell right after share buyback announcements lift the price of the stock? From Wolf Richter at wolfstreet.com:
“Right after the company tells the market the stock is cheap, executives overwhelmingly decide to sell.”
A study by the SEC of 385 recent share-buyback announcements — this is when companies announce how much money they will spend in the future on buying back their own shares, but before they actually begin buying them — found:
- Share-buyback announcements led to “abnormal returns” in the share price over the next 30 days.
- Executives used this share price surge to cash out.
“In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell,” explained SEC Commissioner Robert Jackson Jr. – appointed by President Trump and sworn in earlier this year – in a speech today. He went on:
And, 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:
“This trading is not necessarily illegal,” he added. “But it is troubling, because it is yet another piece of evidence that executives are spending more time on short-term stock trading than long-term value creation.”
The surge in buybacks is largely due to the new corporate tax law. In the first quarter, companies actually repurchased an all-time-record $178 billion of their own shares. In terms of announcements of future share buybacks, May set an all-time record of $174 billion – in just one month! So this business is heating up.
To continue reading: SEC Frets about Share Buybacks, “Torrent of Corporate Trading Dominating the Market,” and “Short-Term Financial Engineering”
