Do Corporate Insiders Use Stock Buybacks for Personal Gain?
July 2, 2019
By Lenore Palladino
In a working paper, Lenore Palladino investigates whether stock buybacks occur more frequently, independent of other factors, when corporate insiders are selling their own personal shareholdings. In her empirical analysis of the relationship between insider sales and stock buybacks, Palladino finds that a 10 percent increase in insider sales is linked to a 4 percent increase in buyback spending. The study examines the occurrence in the same quarter of corporate insiders selling their shares and executing stock buybacks during the period from 2005 to 2017.
The findings show that shareholders may be exploiting a regulatory loophole—there is no regulation requiring companies to disclose buybacks immediately, or even to disclose on what days they execute buybacks. This creates the potential for executives to use stock buybacks to push up shares prices at the same time that they are selling their own personal shareholdings, thus profiting off of a corporate transaction. Given these findings, Palladino proposes that the SEC should rescind Rule 10b-18, and that Congress should ban the practice of stock buybacks in an effort to support a more productive, inclusive, and vibrant economy.