November 2, 2023

Share Repurchases: What Does the Data Say?

In its opinion remanding the SEC’s share repurchase rule, the Fifth Circuit panel noted that the Chamber had submitted data for the Commission to consider. The Chamber did that by way of multiple comment letters that are available on the SEC’s website. One of the newer studies that the Chamber cited to was this one, from a quartet of European professors and part of the Finance Working Paper Series for the European Corporate Governance Institute, which was also summarized last year in this HLS blog. Here’s an excerpt:

The major insight of our paper is that both the timing of buyback programs and the timing of equity compensation, i.e., the granting, vesting, and selling of equity, are largely determined by the corporate calendar. We define the corporate calendar as the firm’s schedule of financial events and news releases throughout its fiscal year, such as blackout periods and earnings announcements. We argue that this calendar determines when firms implement decisions about buyback programs and equity compensation and when firms and CEOs can execute trades in the open market.

As a consequence, share repurchases and equity compensation are positively correlated. However, this correlation disappears once we account for the corporate calendar. Therefore, we conclude that the correlation between share repurchases and equity compensation is spurious and should not be interpreted causally.

Consistent with this insight, we do not find systematic evidence of price manipulation when the CEO’s equity vests or when the CEO sells her vested equity. In conclusion, we find no evidence to support the claim that CEOs systematically misuse share repurchases at the expense of shareholders.

I’m looking forward to people smarter than me describing how they’ve sorted through all of this information.

Liz Dunshee