[Paper Review] The Great Deception: A Comprehensive Study of Execution Strategies in Corporate Share Buy-Backs

Michael Seigne, Joerg Osterrieder|arXiv (Cornell University)|Jul 18, 2023

Private Equity and Venture CapitalBusiness, Management and Accounting3 citations

TL;DR

This paper investigates the execution strategies of corporate share buy-backs, revealing significant inefficiencies and high fees relative to outcomes, especially when compared to institutional and retail investors. It advocates for greater transparency, cost efficiency, and regulatory fairness in buy-back execution to enhance market integrity and shareholder value.

ABSTRACT

We delve into the intricate world of share buy-backs, a strategic corporate capital allocation tool that has gained significant prominence over the past few decades. Despite being the subject of extensive research and debate, the execution phase of these transactions remains an underexplored area. This lack of research into the execution phase is surprising, especially when compared to the extensive literature on other capital allocation decisions, such as acquisition pricing. We aim to shed light on the execution practices of share buy-backs, highlighting challenges and opportunities that arise and presenting a comparative analysis with other aspects of capital allocation. From an outsider's perspective, this paper analyses the seemingly disparate practices and aims to uncover the "dark arts" of execution. The intention is to assist corporations, investors, and regulators in better understanding the intricacies of executing share buy-backs, emphasizing the need for a cost-efficient and regulatory compliant service for corporations trading their own listed securities. We question the seemingly disproportionate fees charged to corporations for similar or even inferior outcomes, compared to retail and institutional investors. We illustrate potential inefficiencies and frictional costs in the current execution phase. The examples highlight the need for greater transparency and fairness in share buy-back executions, advocating for more equitable processes that benefit all stakeholders in the capital markets ecosystem. With the surge in regulatory attention and political pressure fueled by the rising prominence of buy-backs and evolving ESG considerations, it is crucial that we enhance understanding of this key area. This paper seeks to foster dialogue and encourage transparency, thus promoting the efficient use of resources in capital markets, and ultimately, benefiting shareholders.

Motivation & Objective

• To investigate the under-researched execution phase of corporate share buy-backs, which remains opaque despite their strategic importance.
• To identify systemic inefficiencies and frictional costs in buy-back execution that disproportionately burden corporations.
• To compare corporate buy-back execution fees and outcomes with those of retail and institutional investors, highlighting inequities.
• To advocate for regulatory and market reforms promoting cost-efficient, transparent, and equitable execution practices.
• To foster dialogue among corporations, investors, and regulators to improve the overall efficiency of capital allocation in public markets.

Proposed method

• Conducts a comparative analysis of execution practices across corporate, institutional, and retail investors in share buy-backs.
• Analyzes real-world execution data and fee structures to quantify cost disparities and inefficiencies.
• Uses a qualitative and quantitative lens to examine the 'dark arts' of buy-back execution, focusing on hidden costs and asymmetric information.
• Draws parallels between buy-back execution and other capital allocation decisions, such as acquisition pricing, to highlight research gaps.
• Evaluates regulatory and ESG pressures on buy-backs to contextualize the urgency for reform.
• Proposes a framework for assessing fairness and efficiency in buy-back execution based on outcome-to-cost ratios.

Experimental results

Research questions

• RQ1 Why is the execution phase of corporate share buy-backs under-researched compared to other capital allocation decisions?
• RQ2 What are the key inefficiencies and frictional costs in corporate share buy-back execution, and how do they compare to those faced by institutional and retail investors?
• RQ3 To what extent are corporations overcharged for share buy-back execution services relative to the outcomes achieved?
• RQ4 How do regulatory and ESG considerations influence the design and execution of share buy-backs?
• RQ5 What structural reforms could improve transparency, fairness, and cost efficiency in corporate share buy-back execution?

Key findings

• The execution phase of corporate share buy-backs is significantly under-researched despite its strategic and financial importance.
• Corporations are charged disproportionately high fees for share buy-back execution, often with outcomes inferior to those achieved by institutional and retail investors.
• Systemic inefficiencies and lack of transparency in execution practices suggest the presence of hidden costs and information asymmetries.
• The current execution model exhibits a lack of cost efficiency, with no clear justification for the premium fees paid by corporations.
• Regulatory scrutiny and ESG considerations are increasing pressure on buy-back practices, underscoring the need for reform.
• Greater transparency and equitable execution models could significantly improve capital market efficiency and benefit all stakeholders.