Mandatory Disclosure of Share Repurchases: A Shield for Selling Shareholders

Share repurchases, a popular corporate payout mechanism, have become increasingly common worldwide. However, the potential for managers to manipulate the market and take advantage of selling shareholders necessitates strict regulations and mandatory disclosure. This article explores the role of mandatory disclosure in protecting selling shareholders from potential manipulation by management, focusing on the French experience.

Mandatory disclosure of share repurchases serves as a critical safeguard for selling shareholders in several ways. First, it ensures transparency, enabling investors to make informed decisions about whether to sell their shares or not. Second, it helps prevent insider trading by requiring managers to disclose any material information that could affect the share price before engaging in a repurchase. Lastly, it allows regulators to monitor and enforce regulations, ensuring that managers comply with the rules and do not take advantage of selling shareholders.



In France, a study by Bénassy-Quéré, Gourinchas, and Tirole (2005) found that most French firms violated share repurchase regulations at least once over a 3-year period. The most common violations included illegal repurchases before earnings announcements, non-disclosure of repurchases, and exceeding repurchase limits. These violations can have significant consequences for selling shareholders, such as insider trading profits and reduced liquidity.

To illustrate these points, consider the following examples from the study:

* In 2000, the French company Vivendi Universal repurchased shares just before announcing its earnings, which were later revealed to be overstated. This practice allowed the company's managers to profit at the expense of selling shareholders.
* Some French firms were found to have exceeded the regulatory limits on share repurchases, artificially inflating their stock prices and disadvantageing selling shareholders.
* Non-disclosure of repurchases was also a common practice among French firms, leading to a lack of transparency and potentially misleading investors.

These examples demonstrate the real-world consequences of share repurchase violations in France and highlight the importance of regulatory compliance to protect the interests of selling shareholders.

The cost of non-compliance with share repurchase regulations can significantly impact the overall market integrity and investor confidence. In France, a study found that most French firms violated the rules at least once over a 3-year period, leading to insider trading profits and reduced liquidity for selling shareholders (Bouton, 2004). This non-compliance can erode investor confidence, as it indicates that companies may be acting in their own interests rather than those of shareholders. Additionally, it can lead to an adverse selection problem, where uninformed traders are disadvantaged, and transaction costs increase (Durnev & Nain, 2007). Furthermore, non-compliance can hurt the integrity of capital markets by diminishing investor confidence and increasing the risk of market manipulation.

In conclusion, mandatory disclosure of share repurchases plays a crucial role in protecting selling shareholders from potential manipulation by management. By ensuring transparency, preventing insider trading, and enabling regulators to enforce regulations, mandatory disclosure helps maintain market integrity and investor confidence. As the French experience demonstrates, regulatory compliance is essential to safeguard the interests of selling shareholders and preserve the overall health of capital markets.