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If, for example, a company knows it is about to have a large, long-term windfall (such as landing a major contract), it could use this knowledge to increase its value by initiating a buyback. How is this not the same as insider trading?

Or are there rules governing when buybacks can occur that prevent these scenarios? However, it seems that a company always has insider knowledge about itself and therefore could never have an unbiased buyback initiative.

  • 3
    Buybacks have to be approved in advance by the share holders, including the rules about how and when they may be done. – Ian Jan 25 '16 at 22:16
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In fact, buybacks WERE often considered a vehicle for insider trading, especially prior to 1982. For instance,

Prior to the Reagan era, executives avoided buybacks due to fears that they would be prosecuted for market manipulation. But under SEC Rule 10b-18, adopted in 1982, companies receive a “safe harbor” from market manipulation liability on stock buybacks if they adhere to four limitations: not engaging in buybacks at the beginning or end of the trading day, using a single broker for the trades, purchasing shares at the prevailing market price, and limiting the volume of buybacks to 25 percent of the average daily trading volume over the previous four weeks.

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In most countries there are specific guidelines on buy backs.

It is never a case where by one fine morning company would buy its shares and sell it whenever it wants.

In general company has to pass a board resolution, sometimes it also requires it to be approved by share holders. It has to notify the exchange weeks in advance. Quite a few countries require a price offer to all. I.E. it cannot execute a market order.

All in all the company may have inside information, but it cannot time the market.

  • Market timing may be on a very broad timeline for certain information -- for example, a company may know that a major contract will go through within several months. – Brian Risk Jan 27 '16 at 15:51
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Companies already have to protect themselves against employees trading the company's shares with insider information. They typically do that in a number of ways:

  • Making sure that material insider information, like business results and upcoming major transactions, is announced to the stock market as soon as possible.
  • Establishing a general period in which employees can't trade, typically in the run-up to major results announcements (quarterly/annual).
  • This period is shorter for senior management of the company who are likely to have more insider information.
  • Specifically telling people who have material information (e.g. working on a merger) that they can't trade.

Taken together, this tends to mostly mitigate the risk of employees trading with insider information, though it's probably not perfect.

In practice, the company itself's knowledge of insider information is the same as that of its senior management. So it makes sense for a company to be allowed to trade under the same conditions as its senior management.

From https://corpgov.law.harvard.edu/2013/03/14/questions-surrounding-share-repurchases/ :

If the company is repurchasing outside of a Rule 10b5-1 trading plan, it should limit its purchases to open window periods when officers and directors are able to buy and sell securities of the company. In addition, the company also can choose to disclose any material non-public information prior to any share repurchase if it is in possession of material non-public information at a time when it is seeking to make a share repurchase outside of a Rule 10b5-1 trading plan.

As mentioned in the quote, a company can also set up a trading plan in advance (at a time when it doesn't have inside information) to be executed unconditionally in the future. Then even if the company comes into possession of inside information, it won't be using this knowledge to direct trades.

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Another way to look at this is that pure insider trading is an activity with the aim to use secret information to make personal profit or let others make personal profit at the expense of the company shareholders or investors. In buybacks, it is not company managers to get personal gain in this would-be "insider trading". The end-winners in this case are the shareholders. So there is nothing inherently bad in buying back stock. Moreover, it is a general practice to buy shares back (as opposed to paying dividends) when the company sees its shares being undervalued (of course, provided that it has the cash/borrowing ability to implement this), since it creates shareholders value, thereby maximising shareholder wealth, which is one of the primary tasks of the company managers.

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The reason that stock buybacks are not considered insider trading is because the offers are open to all on equal terms to everyone outside the company. Even if the company knows "inside" information, it's not supposed to tell it (and company executives are not allowed to tender shares, unless they had previously set up a "blind" selling program on a"schedule.")

If that's actually the case, no one investor is better informed than another, and hence there is no insider trading. The issue of inside trading is that "insiders" ARE better informed.

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