From 2004 through 2011 the S&P 500 companies spent $2.7 trillion buying back their own stock. A recent article in the WSJ discussed how companies tend to buy back their stocks when they are flush with cash, which usually happens during market boom periods. But when markets are booming, it is likely that companies’ stock prices are also high. In other words, companies buy back their stock when it is likely to be overvalued. In fact, according to this Thomson Reuters report, share repurchases have a 76% correlation with the value of the S&P 500. This is an interesting problem. Management should know the most about its stock (in theory, at least) and be the most rational about it. So in an informationally-inefficient market, management is the most informationally-efficient. Then why does it behave so irrationally? There are three possible reasons right off the top of my head: Just because it knows the…
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