A questionable corporate practice????
Under the noses of investors, corporate directors and regulators, two academic researchers have uncovered a questionable practice that has misled investors and affected stock prices.
For those who have known about it, the behavior has been either ignored or applauded as a routine, clever, and not-too-harmful practice. In the future, however, it could be dealt with more harshly.
This is the conclusion reached after years of study by the professors:
THE ANNOUNCEMENT OF A CORPORATE STOCK REPURCHASE PLAN, a move that often boosts the market price of a company's shares, is often little more than an empty promise.
Studying announcements by 400 of the largest companies, the researchers found that in two of three cases the companies repurchased less than half the shares mentioned, AND IN 40 PERCENT NONE AT ALL.
Moreover, say authors James Westphal of the University of Texas and Edward Zajac of Northwestern University, the failure to follow through on buyback announcements appears to be DELIBERATE and PREDICTABLE.
The practice can produce a measureable uptick in a company's share price, induce NEW PURCHASES FROM UNWITTING INVESTORS and FOOL EXISTING SHAREHOLDERS. Westphal said the ritual was a "symbolic" rather than a "substantive" act "in which both management and shareholders benefit."
In part, Westphal explains, the pressure for making such an announcement emerges from a cultural change over recent years, in which management is expected to emphasize shareholder and social considerations. In short, the announcements apparently made alot of people happy, but obviously excluded from that circle were those who bought on the news, expecting that continued repurchase would be bullish for shares. The practice seems to be contagious.
Surprisingly, the high incidence of this behavior seemed to bring little criticism from those able to do something about it. That included directors, and of course, the Securities and Exchange Commission.
AP Wire.
Well, so much for share buybacks. Can we trust Arif???? |
