Share repurchases and wealth transfer among shareholders

Abstract

We find positive and significant wealth transfers from individuals to institutions following a share repurchase. It appears that institutional investors are informed shareholders that use share repurchases as an opportunity to magnify the effect of their informational advantage over individual investors. On average, we find wealth transfers from individuals to institutions in the amount of $910 million, over the year following a share repurchase. In the largest stocks, we estimate wealth transfers to institutions as large as $2.7 billion over the five years following a share repurchase. The firm’s share repurchase activity partially obscures the impact of the institutional trading and the ultimate change in ownership. This result is robust to an array of alternative methodologies. We find that institutions usually own a larger portion of the firm, relative to individuals, after a repurchase, even when they are net sellers. They simply sell less than individual investors. Thus, using net changes in ownership as a proxy for relative institutional investor demand can lead to false inference as to the relative informational advantage of institutional investors in quarters with significant repurchasing activity.