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

Abstract

When repurchasing shares, companies should aim to get the maximum shares for their money, reduce exposure to market risk, and maintain reasonable commission fees. We identify how companies can fall short in these areas, shedding light on the underlying mechanisms that brokers employ in the process. In the thriving $1.3 trillion global buy-back market, our findings suggest that companies have paid up to $8 billion in excess fees over the last five years.

We use anonymous case studies to highlight instances where companies, intending to buy back £200 million worth of shares, managed to acquire only £184 million worth, with the discrepancy attributed to broker fees. This situation is indicative of a larger pattern in the buy-back market, characterized by high costs and inefficiencies.

In our examination, we unravel how brokers can charge these significant fees despite the inherent uncertainties in the share buy-back market. We also underscore the substantial market risks that companies bear during buy-backs, which we estimate at approximately $276 billion over the past five years.

In light of these findings, this paper suggests a need for review and potential regulation in this space to ensure transparency, fairness, and cost-efficiency. It contributes to enhancing understanding and promoting informed decision-making in the context of share buy-backs.

Keywords: Share buy-backs, Execution strategies, Capital allocation, Regulatory compliance, Frictional costs

JEL Classification: G00