“Right after the company tells the market the stock is cheap, executives overwhelmingly decide to sell.”
A study by the SEC of 385 recent share-buyback announcements — this is when companies announce how much money they will spend in the future on buying back their own shares, but before they actually begin buying them — found:
- Share-buyback announcements led to “abnormal returns” in the share price over the next 30 days.
- Executives used this share price surge to cash out.
“In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell,” explained SEC Commissioner Robert Jackson Jr. – appointed by President Trump and sworn in earlier this year – in a speech today. He went on:
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:
“This trading is not necessarily illegal,” he added. “But it is troubling, because it is yet another piece of evidence that executives are spending more time on short-term stock trading than long-term value creation.”
The surge in buybacks is largely due to the new corporate tax law. In the first quarter, companies actually repurchased an all-time-record $178 billion of their own shares. In terms of announcements of future share buybacks, May set an all-time record of $174 billion – in just one month! So this business is heating up.
SEC Commissioner Jackson pointed at the dark underbelly of these buybacks:
On too many occasions, companies doing buybacks have failed to make the long-term investments in innovation or their workforce that our economy so badly needs.
And, because we at the SEC have not reviewed our rules governing stock buybacks in over a decade, I worry whether these rules can protect investors, workers, and communities from the torrent of corporate trading dominating today’s markets.
Executives often claim that a buyback is the right long-term strategy for the company, and they’re not always wrong. But if that’s the case, they should want to hold the stock over the long run, not cash it out once a buyback is announced. If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is.
He called on his colleagues at the SEC “to update our rules to limit executives from using stock buybacks to cash out from America’s companies.”
In 1982, when corporate share buybacks became legal – until then, they were considered a form of stock manipulation – the SEC adopted some rules, including a safe harbor provision from securities-fraud liability if the pricing and timing of share buybacks meet certain conditions.
“After experience proved that buybacks could be used to take advantage of less-informed investors, the SEC updated its rules in 2003, though researchers noted that several gaps remained,” Jackson added. “In the meantime, the use of stock-based pay at American public companies has exploded.”
[T]he theory behind paying executives in stock is to give them incentives to create long-term, sustainable value. Because executives who receive shares rather than cash demand higher levels of pay, the use of stock-based compensation has led to eye-opening pay packages for top executives.
He reminded us that “in the years leading up to the financial crisis, top executives at Bear Stearns and Lehman Brothers personally cashed out $2.4 billion in stock before the firms collapsed.”
Tying executive pay to the growth of the company, he said, “only works when executives are required to hold the stock over the long term.”
Part of the problem is that the SEC has not yet turned the provisions in the Dodd-Frank Act that were “designed to give investors more information about whether and how managers cash out” into actual rules. Thus investors are still kept “in the dark about executives’ incentives.”
“But it’s not just that the regulations haven’t been finalized. It’s that the problem itself keeps getting worse,” he said. The new tax law “has unleashed an unprecedented wave of buybacks, and I worry that lax SEC rules and corporate oversight are giving executives yet another chance to cash out at investor expense.”
[B]uybacks give executives an opportunity to take significant cash off the table, breaking the pay-performance link. SEC rules do nothing to discourage executives from using buybacks in this way. It’s time for that to change.
He proposed, among other suggestions, that “SEC rules should encourage executives to keep their skin in the game for the long term. That’s why our rules should be updated, at a minimum, to deny the safe harbor to companies that choose to allow executives to cash out during a buyback.”
And he added:
The increasingly rapid cycling of capital at American public companies has had real costs for American workers and families. We need our corporations to create the kind of long-term, sustainable value that leads to the stable jobs American families count on to build their futures. Corporate boards and executives should be working on those investments, not cashing in on short-term financial engineering.
Investors deserve to know when corporate insiders who are claiming to be creating value with a buyback are, in fact, cashing in.
But this surge in share buybacks, and the corporate dominance in the stock market via those share buybacks, may have a limited life. Read… Huge New Prop under the Stock Market is a One-Time Affair
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“Short-Term Financial Engineering” by my observation, is the cornerstone of a “vibrant” service economy.
Share buybacks are absolutely required to keep stock prices going up when revenue and profits are not. The top 1/3 of the entire US market carries a trailing PE multiple of 50. Imagine what it would be if these US companies hadn’t spent trillions on buying back their own shares? The fact is, stock prices HAVE to keep going up, forever, for or entire economy to work. Regardless of whether or not companies are growing their bottom lines. Every Government budget (federal and state), Pension, 401K, IRA, 529…all are dependent on stock prices rising forever. Everything will be done to keep the illusion alive.
Stock manipulation (buybacks) is legal because it is NECESSARY for stock prices to always go up over time. And stock prices don’t just need to go up, they need to go up EXPONENTIALLY. Every pension has it built in. Every government budget does as well. The DJIA and SP500 are simply a bulletin board of prices determined by a small amount of people that own the majority of shares.
two things come to mind, you’re correct and they just keep hanging a number on it, without any accompanying economic inflation. the second is that as these security products become more streamlined, paper securities become commodities, that this system no longer functions as it was designed, a glorified ponzi scheme to inflate the value of those who hold the paper on real collateral. It’s also possible that as the stock market becomes more of a commodity market (one buyer one seller) that taking a long term short position is much easier to do, and justifiable, and that institutions who glorified the bull market for so many years will profit mightily by selling stocks. Money is like corn, every year the farmers bring it to market (pension funds, 401K) and the cycles and growth rate are predictable, thus allowing people to sell forward, (commodity markets were made to help farmers) and that the rule against shorting are archaic, left over from the old days of paper certificates, would be repealed with a fair and open commodity style system on the stock exchange.
Last 8 years Cash Flow from Operations for the S&P500 summed in total: ($s Trillion)
2018: 1.70 Trillions.
Oh gee. Perverse incentives create moral hazard? Who would have thought?
I’m glad the SEC commissioned a study — after 35 years — to figure this out. Those guys are Johnny-on-the-spot! (sarcasm alert)
Trouble is, it’s too late to fix it and the SEC knows it. The markets have been divorced from fundamentals since 1987. To keep it going requires bilking successive generations of new marks.
Does anyone honestly believe we’ll see meaningful enforcement of truly competitive arms-length transactions anytime soon? That might pull us back to average PE ratios of 14:1. Nobody wants that. They especially don’t want it if they were required to pull all their costs back onto their published GAAP compliant balance sheets.
MF, you hit the nail square on the head. We all know none of this will change because, as you said, “nobody wants that” (and by nobody you must, of course, mean the wealthy and well connected of society).
I grew tired of bureaucratic, government, double speak long ago and now I’m just numb to it.
We are told the central bank has to take an active role in manipulating assets (stocks, bonds, RE), then we are told assets are not manipulated. We are told we need to save more, then we are told we need to spend more. Young people are told to take on student loans, then they are told they were irresponsible to do so. We are told inflation is too low but we should be invested in the stock market to avoid being wiped out by inflation.
I stay fully invested in stocks because everyone, who can control the price trend, has a vested interest in moving prices higher. Based on valuations stocks should correct one day, but based on who controls the price action and the falling value of currency I just don’t think stocks can fall.
Sure CEO’s, and other corporate officers, are cashing out but their boards keep issuing them new stock options to inflate and central banks keep providing companies cheap cash to buy back stock. Nothing changes. I will say it’s nice to, finally, be on the side of gaining as stocks continue the relentless climb to the heavens.
Listening to the SEC fret about corporate financial engineering is like listening to a prison warden complain about prisoners not returning after he grants them leave. The SEC and congress are at the root of the problem, it’s astonishing to hear them complain about the problems they cause – kind of like Bernie Sanders and Trump complaining about the deficit, it’s just laughable.
We will not see meaningful enforcement or reform. We need another depression of 1929 but worse and another world war and there will be no FDR waiting in the wings to save capitalism. On top of that Climate Change will make humankind go extinct.
“FDR waiting in the wings to save capitalism”
Now, that’s too rich…
Amen, brother. Denial is not just a river in South America….
“the paradox of
POVERTY IN THE MIDST OF PLENTY:
THE MARKET AT ANY PRICE..”
“FDR was prepared to to save the structure of the market economy by subsidizing nonproduction and by destroying what could not be transferred or processed through the market..”
From Take Today: The Executive as Dropout
Marshall McLuhan, 1972
essentially by the use of price controls the family farm was plowed under. interest rates are the ultimate in price controls. and all the confusion about inflation in automobile prices only confirms the suspicion that the great depression never really ended and the Feds end game has not changed despite some nitpicking about their policy mistake in the 37 rate hike.
[the CAPS are his]
This scenario was predicted by Trim Tabs. There was one variation in the corporate tax cut that was specifically stipulated and stated that IF a corporation chose to invest in U.S. commercial real estate the tax on corporate profits would be 8%. Corporations like Amazon and Apple have since been shopping for locations to build new offices and warehouses in the U.S. The 21% tax reduction had no target or stipulations so, what did they do? Since they had no profitable long term plans for the company, they enriched themselves. The top individual tax rate is currently 37% the capital gains tax is 28% so, they augmented their income with stock options taxed at the lower rate and they also did not have to pay payroll taxes on the capital gains. When you see a corporation do this they have lost their long term vision and need to revisit their mission statement.
Sadie, that is not how incentive stock options work. When you exercise and sell the same day, the gain is taxed as short-term capital gain or regular income. If you exercise and hold for one year and then sell, it would be taxed as long-term but your are subject to AMT at the time you exercise which treats the options as regular income. That is you have to come up with hundreds of thousands of $s to pay AMT before you actually sell you stock.
Hi, thanks for this. However, I dont understand. If you sell and recieve the money dont you have the cash to pay for the gains/tax?
Here’s a link that will answer your questions.
It was my understanding that what income bracket you are in determines whether you should use the AMT. As you mentioned, if you hold the options long term you are subject to the long term capital gains tax. I have exercised company stock options that had to be held for a specific time period when they were granted. You can hold them as long as you like after the specified time period. It is beneficial to exercise the options when the company is buying back shares since the stock price is usually higher. As for taxes I only paid the long term capital gains tax and I used part of the profits from exercising the options to pay the taxes.
A detailed explanation with examples can be found by going to investopedia and searching under the phrase “capital gains tax bracket”
Two types of options and their tax treatment
Easy option for lazy executives to keep investment funds happy, and of course as is pointed out in the article make a quick buck for themselves, without a thought for the medium to long-term health of the company.
Stock buyback schemes are the perfect paradigm of a Ponzi, because you’re choking the life out of the company ultimately by loading up with debt in order to satisfy the demands of greedy ‘activist investors’, who care nothing about the employees or their futures.
Another ‘gift’ from the wonderful world of the cheap credit magic money fairy. Beats workin’ hard, eh?
And the changes keep filtering down.
Only a couple of years ago, this would be considered as the optimal means for globalists to accumulate wealth via low to, someday, negative interest rates. Remember, low rates and asset inflation to a globalist replaces income from normalized rates and earned capital for everyone else. The people with connections replace the people who managed to save from earnings. They almost had it. Missed by an inch. Must suck to be a globalist today.
Yet the SEC mimics the famous scene from Casablanca. Better late than never.
Except this is not a better late, this is just hot air.
I mean, it’s almost like executives are force fed their stock options.
True, as long as they have access to OPM, the executive stock buyback crowd are just like the Chinese mandarins who stole enough to become so wealthy that overseas real estate bubbles that will ultimately explode are considered minor overhead expense. They are our version of them, without the need for laundering beyond following the legal and historical route to do it, using the corporation as the tool.
Let the corporations and their executives decide what’s best for them. There is nothing fair or unfair about this. How ever, it is totally another matter if the TAX payers will pay to bail them out when they sink. It is totally another matter if the FED suppresses rates and prints to shower these guys money.
And the FED worries about corporations?!
I was gonna say the same thing regarding Casablanca. The SEC must be shocked, shocked! to see gambling, I mean short term wealth extraction, going on here.
guess i’m a globalist.
i do some work, too.
More crocodile tears! At the very least, stock buybacks using borrowed money should again be illegal, or taxed so heavily as to be unprofitable.
“[T]he theory behind paying executives in stock is to give them incentives to create long-term, sustainable value.”
Pay me in stock and my incentive is to do everything I can to maximize the price of the stock. I’ll do buy-backs, cut R&D, offshore manufacturing to low-cost labor countries, bust labor unions and their pensions, buy up my competitors and jack up prices. Whatever it takes to maximize short-term profits. Then I’ll cash out and walk away. Hopefully, that’s the definition of “long-term, sustainable value”.
Unfortunately, that’s not a principal-agent problem but a pure principal problem: shareholders themselves are incentivized to behave that way and therefore compensate executives accordingly.
We need to come up with some sort of executive compensation scheme where at least part of their renumeration involves some mechanism whereby they are paid a portion of company earnings over the long term and over time (even after they leave the company for a certain amount of time) – without the ability to “sell” that claim at some highly inflated NPV to someone else. If execs knew ahead of time that a significant part of their their compensation would be in some kind of future stream of dividends or whatnot they might be more interested in making sure the company is profitable in the long term, not just in this very instant.
They have plenty of incentives. They can get millions in severance packages alone. So if they screw up, they don’t care. I wouldn’t care either if my pink slip was 7 figures and not 7 fingers.
Plenty of incentives, yes – but they are all immediate pay type incentives.
Put restricted stock in escrow only to be released to the executive four years from the date it is awarded.
I see plenty of guys in the Lowes parking lot looking for work and I’m pretty sure almost all of them would be qualified to take over the duties of the average CEO for much lower pay.
Kenneth Lay and Jeffrey Skilling, of disgraced Enron infamy, used as their defense the fact that they were mere figure heads in suits and had no dealings in the day to day operations of the company. The typical day laborer is just as qualified to get a nice haircut and suit and work as a figure head but for much less money (and zero stock options).
Who honestly believes any of the these guys actually adds as much value as 500 to 1000 employees? The job of the typical CEO is to get the job, after that he just sits back and enjoys his yacht (and his mistresses).
This is laughably untrue. CEOs are not replaceable by any random individual. You may not like them, but the problem with high level execs is not their lack of talent!
However, I do agree that the executive compensation ratio is out of whack and that selling into announced buybacks has to be limited.
The biggest difference between the parking lot guys and 90% of all CEO’s is confidence. Anyone who occupies the C-suite of a large to mid-sized corporation has played the confidence game to some degree, some better than others. And, no, most CEO’s I’ve meet are just rentiers who don’t know how to operate anything. “Fake it ’til you make it.”
Kenneth Lay and Jeffrey Skilling whole heartedly disagree with you. They do nothing but show up, time to time, and do a bunch of glad-handing. Daddy got them into Princeton and that was sufficient, nothing required beyond that.
Wake me up when all this BULL SHIT is over
I should work on being as succinct.
Quick take a bite of this poison apple.
There are a couple of things I would add:
1) Interest is deductible on the corporate side; dividends are taxed at both the corporate and individual level. Disallowing the deductibility of bond interest used for share repurchases would make them less attractive.
2) Some companies may be spending cash and loading down with debt to make themselves less vulnerable to a hostile takeover.
The elections of Reagan and Thatcher ushered in a new era of casino capitalism in the early 1980s. The 1% has made out like bandits, quite literally.
Would it be possible to make money in this market with a “remora” strategy–follow the sharks–buy stocks of companies that are likely to do buybacks and then imitate the sharks, er, executives, and sell during the runup to the buyback? Of course, in any sort of downturn, the strategy would fail immediately. This is strictly a theoretical question. I have vastly insufficient funds to pursue it, and anyway, the downside looks scary and precipitous.
When researching stocks, I typically check on the trends of insider buying and selling of their stock. Over the past 3 to 4 years, it is hard to find any companies with insiders using their own cash to accumulate stock. In the case of tech companies, it seems most managers are backing up the truck and cashing out well before reporting any profits.
The tax benefit from the Republican bill is a one-shot deal. There were buybacks worth $174 billion in May — about three times prior monthly levels — because of the tax bill. The shame — one among many — is that the money was not used to build more competitive facilities, to materially raise wages, or to retire debt.
Zorgon, you seem surprised. Did you think the tax bill was written for the benefit of average citizens? Consider, we have a President who had 7 deferrals from military service during the Vietnam draft but is outraged about a lack of respect by NFL players during the national anthem. If these people had true patriotism, would they be writing tax laws that benefit only the wealthy? “Fake news”… “worry about deficits”? Do you really believe any of that s##t??
The SEC FINALLY sees an issue with Stock buy backs.
This means there is a VERY BIG problem, coming in to land.
Yes it really is that simple.
Reported today in the Minneapolis StarTribune business section:
Polaris Industries Inc., Scott W. Wine CEO
Exercised Options of 245,000 shares at $10.03-$65.67
Sold 245,000 shares on June 5 at $118.36-$119.05
Directly holds 332,154 shares
On May 30, Polaris paid $805 million in cash to buy Boat Holdings LLC of Elkhart, Indiana.
Not a bad week’s work for the CEO of a Minnesota snowmobile company; buy a boat maker for nearly a billion bucks, and put an extra fifteen to twenty-five million bucks in your bank account.
Wine’s remarks on the acquisition: “Boat Holdings is renowned for innovation and quality and we are excited to have them become part of our portfolio of industry leading power-sports vehicles. This transaction epitomizes our disciplined growth strategy of entering attractive markets where we can establish and extend our leadership position. In addition to marketshare leadership.”
I give Polaris credit though as they bought another manufacturing company instead of buying back their own shares.
“Innovation” like this is what arguably makes Murica great!!!!
Murica is the bestest when it comes to 3rd world condition engineering. And here’s the playbook:
1. Test various banana republic recipes on other countries through the IMF.
2. Bring them home.
That’s why Ethan Hunt will always be employed!!!
Cut the crap.
CEO’s and their partners in crime ( read : the brownnosers and/or insiders ) are enriching themselves every day. Been there, seen it all.
I did NOT participate in all this – I am an honest person who feels rewards should be given to people who really created added value for a company.
I must be very stupid ….
The SEC, the most worthless of “our” captured and complicit regulators and enforcers, exists for one purpose: to provide the Wall Street-Federal Reserve Looting Syndicate with a veneer of legality for their crimes and swindles against the muppets. When the next Fed-engineered stock market crash bilks the middle and working classes out of their retirement funds, the SEC will wring its hands and proclaim that no laws were broken and no banksters or Fed officials need ever face criminal consequences for their racketeering.
Christopher Cox, the director of the SEC in 2008, didn’t see the financial collapse coming but defends himself as having done a good job “modernizing” the agency (Reuters).
If we had an honest justice system, every single SEC official would’ve been sentenced to the same chain gang as every Fed official and Wall Street grifter for their role in causing the 2008 financial crash.
I’m probably crazy but I’ve always been of the contention that ALL income should be taxed the same. The income of a bricklayer, garbageman, janitor, head of GM or whoever; whatever their income they all pay the same…ordinary income tax. If it’s 25% for the plebes then it has to be 25% for the money slickers. Having all these “escape levels” of differently defined incomes just gives the shysters more incentives to be better shysters.
the idea that corporate executives are greedy venal and self-interested is hard to swallow.
He called on his colleagues at the SEC “to update our rules to limit executives from using stock buybacks to cash out from America’s companies.”
Talk is easy. Doing the right thing is infinitely tougher. Wanna lay any bet on SEC doing anything on this?
Martha Stewart went to prison for insider trading while the real insiders get invited to the White House..
She went to jail for lying to a federal investigator.
The truth can never catch up with a professionally propagated internet lie
Especially when it is propagated by the hater’s of the wealthy.
Well, she should be pardoned! Lying is okay now.
Share buybacks = Chapter 11 bankruptcy
These companies likely can buyback their shares one hundred years from now in the future at the same price points as today.
Corporations are a human invention designed to reduce risk for owners of capital. The rules as written are very generous so it should be no surprise that owners of capital take advantage of them.
Globalization has as its main beneficiaries the corporations. They have the freedom to move around their capital in ways the average worker can not. They have the ability to move to where tax rates are lowest unlike the average worker. They also have the ability to cheat and steal and pollute without full consequences (a small fine versus a jail sentence).
What is desperately needed in a globalized world is a revision to the rights and responsibilities of corporations. With the special rights of limited liability must come far more onerous responsibilities on management and owners.
– no stock options once a company reaches a certain size (options should only be for small or startup companies)
– stock buybacks by dutch auction/tender, not at the market
– real voting on directors and pay, not the sham we have now
– clawbacks on bonuses and pay for bad behavior
– enforcement of gaap only reporting
– increased anti trust
– no buying of other companies once a certain size is reached (anti competitive)
– employee representation on boards
– the ability of governments to put companies in jail for criminal offenses (i.e. out of business), with no way out via fines.
….. that is, a lot more restrictions on what has become a far too generous system (shelter from responsibility) for owners of capital.
Labor and Capital are the ultimate two resources in use by every corporation. I challenge you to find how much a company spends purely on Labor (salaries), in 99% of the 10s of thousands of pages of financial disclosures put out every year by “accountants”. Challenge. Can you guess why?
Unfortunately, the average person in this country doesn’t know or care about these financial shenanigans
Six media conglomerates owned by globalist oligarchs control every media outlet of note in this country. These media outlets and their owners have a vested interest in keeping the sheeple grazing placidly on the shoots sprouting from the manure the MSM spreads across their pasture. However, when millions of sheeple lose their retirement accounts and houses in the next Fed-engineered stock market and housing bubble crash, they might finally wake up from their comas and suddenly become enraged over the swindles being perpetrated against them by the Wall Street-Federal Reserve Looting Syndicate and its political and media enablers and accomplices.
“However, when millions of sheeple lose their retirement accounts and houses in the next Fed-engineered stock market and housing bubble crash, they might finally wake up from their comas and suddenly become enraged over the swindles being perpetrated against them by the Wall Street-Federal Reserve Looting Syndicate and its political and media enablers and accomplices.”
No, they won’t. It happened 10 years ago and most chocked it up to gosh darn bad luck.
Even before GFC I in 2008, tax treatment favoured debt over equity. Replacing equity with debt has never seemed to worry the authorities. But things have become much worse with ZIRP, exacerbated by perverse incentives.
This means that, as well as imperilling banks as in 2008, GFC II will take out huge chunks of the corporate sector too.
Truly our affairs are governed by idiots.
There is a lot of misinformation in the comment section on how stock options work. Almost all people exercising stock options end up paying top bracket ordinary income taxes on exercises. Stock option exercises will almost always put you into the top tax bracket for that year. If you exercise and sell, you pay ordinary income tax rates on your gain. If you exercise and hold for a year, you have to come up with not only the purchase price of the options but you also end up paying AMT on the paper “gain” in the year of the exercise. That is why almost everybody exercises and sells the same day.
When you are granted stock options, they vest several years down the road. The purchase price of the stock option is usually 10% below market value when they are granted.
Yes, stock options can be very lucrative but the IRS makes almost as much on them as the grantee.
The message for the need for the corporate tax cut was to allow US corporations to compete more fairly with the world as the US had the highest corporate tax. So these corporations then bring their foreign held money (profits) back to the US, not to make them more competitive, but to buy back stocks. Less government debt is paid and more money goes to the shareholders. And before the pension funds make money the Insiders cash in.
These corporations needed tax cuts and financial schemes to boost stock prices instead of producing competition and products of value. Redistribution and Ponzi all in one.
Surely our ever-vigilant regulators and enforcers would never allow the massive manipulation of markets…would they?
If managers sell immediately after buyback announcements than an average they are not very smart as the long run excess returns after buybacks are positive, In other words they sell undervalued stock, not really great insiders.
The last time I saw an “undervalued” stock was quite a while ago. This is such a quaint notion, in this era of ludicrously overvalued stocks.