Professor Damodaran, do you think that the implementation costs of share buybacks is something that needs to be understood more? Ultimately the benefit of a share buyback to the holding shareholder is determined by how many shares are actually purchased. The greater the number, the greater the increase in ownership for those shareholders who choose not to sell.
That means that the execution strategy used to for a share buyback, should, if it is designed for the interests of the holding shareholders, attempt to buy as many shares as possible, in a risk efficient manner.
The current implementation process imbedded in ASR's and a significant portion of OMR's (accelerated share repurchases and open market repurchases) use an execution strategy that is very inefficient. If we estimate this inefficiency to be in the region of 3%, then you can see the compounding effect of this cost over time is enormous. Over the last 5 years, if you assume 50% of buybacks are executed using this inefficient execution process, is in the region of $90bn... if you go back to the start of these products the cumulative cost is in the trillions.
I am not anti buybacks, I just think when we do them, we should be using the efficient execution process used by asset managers, not the execution products sold by the derivative businesss such as ASR's.
Professor Damodaran, do you think that the implementation costs of share buybacks is something that needs to be understood more? Ultimately the benefit of a share buyback to the holding shareholder is determined by how many shares are actually purchased. The greater the number, the greater the increase in ownership for those shareholders who choose not to sell.
That means that the execution strategy used to for a share buyback, should, if it is designed for the interests of the holding shareholders, attempt to buy as many shares as possible, in a risk efficient manner.
The current implementation process imbedded in ASR's and a significant portion of OMR's (accelerated share repurchases and open market repurchases) use an execution strategy that is very inefficient. If we estimate this inefficiency to be in the region of 3%, then you can see the compounding effect of this cost over time is enormous. Over the last 5 years, if you assume 50% of buybacks are executed using this inefficient execution process, is in the region of $90bn... if you go back to the start of these products the cumulative cost is in the trillions.
I am not anti buybacks, I just think when we do them, we should be using the efficient execution process used by asset managers, not the execution products sold by the derivative businesss such as ASR's.
It would be great to talk about this... please see this paper co-authored with a Prof of Finance in Europe on this topic...https://www.candorpartners.net/_files/ugd/af1214_ed10b01d34d042c480a4e5f1f68f3778.pdf