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I've been trying to understand animosity to buybacks. It's definitely not that buybacks are often done at high prices that harm shareholders as we've discussed. The animosity comes from a number lines of reasoning, some of which arises from "misunderstands corporate finance" and some animosity comes because there's a few types of bad behavior associated with buybacks.[1] One is taking bailout money and doing buy backs. Here's a lesser known one that strikes me as actual corruption. This quote is from a speech by former SEC Commissioner Robert Jackson:

"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."

I guess that is what they call establishing "plausible deniability."

I labeled this OT but is it? Buffett carefully does stock buybacks as a form of delivering the benefit of excess profits to shareholders, but we are now paying a 1% tax because of the stench around stock buybacks. Try explaining that Buffett is different than all those other people doing buybacks, so a penalty tax is not appropriate. Good luck!


[1] I took the above quotes from today's opinion piece by Matt Levine https://www.bloomberg.com/opinion/articles/2023-05...

"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."

I'm not sure I see the problem? It's public knowledge, and anyone that owns the stock can do the same thing.

Brian

I'm not sure I see the problem? It's public knowledge, and anyone that owns the stock can do the same thing.

I see the problem as follows: after the announcement you know the same as the executives, but before the announcement they have the choice to postpone their buy/sell decisions based on this internal knowledge - which they obviously do.

" 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 is certainly bad behaviour.
But trading on material non-public information is already quite illegal in the US*, so there isn't really any need for a new rule or tax or prohibition.

A point that is often not emphasized enough: note the last word of the quote.
Buybacks don't on average raise the value of a share, so they don't on average change the price other than momentarily.
(assuming that the average buyback isn't done below intrinsic value, which the research supports)
But buyback ANNOUNCEMENTS move the price. In this case, perceptions are more important that the reality.

Jim

* Unless you're elected to congress, of course.

but before the announcement they have the choice to postpone their buy/sell decisions based on this internal knowledge - which they obviously do.

I guess that's not obvious to me. The original post here and Matt's article just say they average $100k/day in sales before the buyback and $500k when the stock goes up. Is that $100k unusually low? Like if they average $250k until the week before the announcement, drop to $100k right before the announcement, and then pop up to $500k, yes, it's a reasonable conclusion they slowed their selling knowing the announcement was coming (i.e. had inside knowledge). But I don't see any suggestion that's the case (it may be, I just haven't seen that even suggested). If they average $100k all the time and then sell more when the stock price increases, that's just taking advantage of what the market's offering. I've done the same thing (with significantly smaller numbers :-) ) and certainly had no inside knowledge.

Brian

Brian and others, I should have included the link to the speech by former SEC commissioner Robert J. Jackson Jr.

https://www.sec.gov/news/speech/speech-jackson-061...

After talking about the use of stock "to give corporate managers incentives to create sustainable long-term value" he asks "Or are we paying executives to pursue short-term stock-price spikes rather than long-term growth?" He then says, "Even more disturbing, there is clear evidence that a substantial number of corporate executives today use buybacks as a chance to cash out the shares of the company they received as executive pay." I recommend Mr. Jackson's statement of the problem.

Wouldn't it be best to avoid the question of self-serving behavior by not leveraging a buyback effect? Just avoiding illegality is a low standard for leadership.

I should also have pointed out to search for "People are worried about stock buybacks" in Matt Levine's writing in order to skip over the unrelated topics. I was interested to hear Todd Combs mention Matt Levine in the NFM interview.

I'll repeat that my main concern is understanding the negatives around buybacks that are driving both targeted taxation and suggestions to outlaw buybacks.

I was wondering if Rule 144 still applied to, inside sellers. Appearantly rule 144 still applies. https://www.investopedia.com/terms/f/form144.asp

In the 90s, we were required to have a legal opinion with our 144 form , and, the companies lawyer had to sign off on the sale, as well. Apparently, those regs have been amended to favor the seller, no legal opinions currently required.

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