The news of the contemporary world is not lacking in major subjects for which public opinion expects from economic and political leaders concrete decisions likely to contribute to improving the situation. Among these many topical themes, we wish to emphasize the share buybacks of a firm by itself, apparently technical operations and little known to the public. However, the latter deserve to be studied in the behaviors they reveal and their economic impact.
For many years, these operations, once rare, even prohibited, have become very frequent. These share repurchases indeed modify in a significant way the functioning of the financial markets because they can be similar to a manipulation of stock market prices.
In 2019, we had already drawn attention to this worrying wave on the American stock exchanges. Since then, this wave has continued, driven by “accommodating” monetary policies (quantitative easingor QE, in Europe, and zero interest rate policy, or ZIRP, in the United States) facilitating the use of credit and amplified, in the United States, by the tax measures taken under the presidency of Donald Trump to encourage multinational firms Americans to repatriate liquid assets placed abroad.
At the end of 2021, the amounts of these share buybacks even exceeded the 1,000 billion dollar mark in annual flow for the S&P 500 alone, the stock market index based on 500 large listed companies. These annual flows have become larger than those of dividends paid. For example, Apple carried out, in 2021, 85.5 billion dollars in share buybacks for 14.5 in dividends. Over the last ten years, the total amount of share buybacks of the Cupertino company amounts to 567 billion dollars. In some years, the total flow of dividends and share buybacks was even greater than the flow of new share issues, thus reversing the financing function of the financial markets.
A trend that is spreading across Europe
In other regions of the world, these operations are less gigantic but are starting to become significant. On September 1, the newspaper Les Échos wrote: “large European companies have massively turned to share buybacks since the pandemic. They tripled in one year to reach 70 billion euros in the first half in Europe, including 15 billion in France”.
Thus, the Total Energies group has initiated a new share buyback plan “in accordance with the announced policy of allocating up to 40% of the surplus cash generated above 60 dollars/barrel to share buybacks “, noted the same newspaper a month earlier; these should thus reach 7 billion dollars in 2022.
Compared to this quasi-tsunami, one can be surprised at the limited reactions, both from the authorities concerned and from the world of research. At the level of the authorities in charge of these issues, the measures taken or envisaged are modest. In the United States, after much procrastination, the Securities and Exchange Commission (SEC), the American stock market policeman, published new regulations for these operations at the end of 2021, essentially aimed at improving the information required. In addition, the US Senate voted in August 2022 for a light tax (1%, applicable from January 2023).
In other regions of the world, on the other hand, and in particular in Europe, we have not heard, to date, of draft decisions on the matter, unlike other themes, related but distinct, such as “superprofits” and their possible taxation…
The silence, or at least the sparseness of the research devoted to this issue of share buybacks seems even more surprising. Admittedly, there are a number of works that have focused on these questions, sometimes with acuity; but the researchers concerned are often marginalized in the academic world of finance. The latter remains largely dominated by a theoretical construction developed over a few decades forming a paradigm – called “mainstream finance” – from which researchers have, it must be admitted, difficulty in freeing themselves.
This is how a share repurchase operation can be easily explained from the concept of free cash flow, which denotes the flow of cash available once the investments have paid off. Managers are urged to return this excess cash to shareholders rather than using it in a sub-optimal manner. The share buyback operation thus appears as a means of disciplining managers and expresses shareholder-oriented corporate governance (shareholder-oriented corporate governance)as this school of thought recommends.
Such a theoretical justification could make many financial professionals smile. Admittedly, share buyback operations may constitute the appropriate solution to resolve specific situations (for example, the death of a co-founding member of a company of which the other partners wish to retain exclusive control) or, more broadly , for listed companies, make it possible to modify the shareholding structure by reducing the share of “free float” in favor of stable shareholders.
Nevertheless, beyond these operations aimed at the distribution of capital, these share buyback announcements are intended primarily to please shareholders in the short term by supporting the stock market prices of the shares of the companies concerned. Managers who propose such maneuvers also find it to their advantage, the good performance of stock market prices having become a major expression of their ability to “create value” and incentive instruments have been created for this purpose (thus stock options ).
We can speak of “manoeuvres” or “signals” because many of these operations remain only at the declarative level and are not carried out; others are, but are then followed by a capital increase, therefore in the opposite direction. This result therefore appears consistent with the hypothesis of price manipulation.
On the other hand, when these operations are settled by a cancellation of the repurchased shares and by a parallel reduction in both the cash resources and the equity of the company concerned, the latter could find itself in difficulty in the event of subsequent events (or opportunities) calling for rapid and significant funding to deal with them; a situation which, moreover, is in line with a disciplinary approach to shareholder-oriented governance, the financial market having to assess the situation.
As can be seen with these few examples given and these initial thoughts, it seems desirable that finance professionals, like public opinion, research institutions and sovereign authorities, become aware of the challenges represented by these excessive recourses to buybacks. actions to provide them with much-needed regulation.
By Elisabeth Walliser, Director of the IAE of Nice, Management Research Group (GRM), University of the Côte d’Azur andUniversity Professor (er), Montpellier Research in Management, University of Montpellier
The original version of this article was published on The Conversation.