Executives can use repurchases to enrich themselves

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Executives can use repurchases to enrich themselves because disclosure requirements are woefully inadequate. When executives trade personally, they must publicly disclose the details of each trade within two business days. The spotlight created by such real-time, fine-grained disclosure helps curb trading abuses by executives. By contrast, the SEC only requires a firm to report, in each quarterly filing, the number of shares repurchased in each month of the quarter and the average price paid per share. Investors see this filing a month or so into the next quarter, one to four months after the buybacks occur. And they never see individual repurchases, just aggregate transaction data. Researchers can detect the existence of buyback abuses across a large sample of public firms, but investors cannot easily identify the particular executive teams using repurchases to line their own pockets. A simple, common-sense regulatory change would curb such abuses. In particular, the SEC should require a firm to disclose each trade in its own shares within two business days, as it does for executives personally trading company stock. This two-day rule would shine a spotlight on repurchases, discouraging executives from using them opportunistically. For example, if such real- time disclosure leads investors to believe that executives are using a buyback to buy underpriced stock, the stock price would start rising, reducing executives' indirect profits from any subsequent repurchases, and thereby increasing public investors' returns. A two-day rule won't unduly burden firms' use of repurchases for proper purposes, just as the rule doesn't unduly burden individual insiders. Indeed, some of the largest stock markets outside the U.S. already require even more timely disclosure by firms trading in their own shares. In the U.K. and Hong Kong, firms must report a repurchase to the stock exchange before trading begins the next day. Japan requires same-day disclosure, and Swiss investors see these trades in real-time. Even if the two-day disclosure rule doesn't eliminate completely executives' abuse of buybacks, it will generate fine-grained data about repurchases that can be used to decide whether more aggressive regulation is desirable. The regulatory reforms currently under consideration, such as empowering the SEC to block buybacks, might curb these abuses even more. But they also could generate huge economic costs by impairing the circulation of capital in the economy. It would be foolish to go straight to such drastic measures rather than start with a modest regulatory tweak: subjecting firms to the same trade- disclosure requirement as their own executives. Buyback Derangement Syndrome By Clifford Asness 17 August 2018 The Wall Street Journal Share buybacks are when a company purchases its own common shares on the open market. After a buyback, a company is left with less cash and fewer shares outstanding. Buybacks, along with ordinary dividends, are one of the main ways companies return cash to investors -- the ultimate objective of any investment. So why have buybacks become the subject of vitriolic criticism?
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  • Fall '09
  • Robbins

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