The Mysteries of Share Buyback Execution: Trading Anomalies, Benchmarks, and Psychological Misconceptions

T HE M YSTERIES OF S HARE B UYBACK E XECUTION : T RADING
A NOMALIES , B ENCHMARKS , AND P SYCHOLOGICAL

M ISCONCEPTIONS
Joerg Osterrieder Michael Seigne

Institute of Applied Data Science and Finance Candor Partners Limited
Bern Business School London, UK
Bern, Switzerland mseigne@candorpartners.net
joerg.osterrieder@bfh.ch
Department of Hightech Business and Entrepreneurship

Faculty of Behavioural, Management and Social Sciences
University of Twente
Enschede, Netherlands
joerg.osterrieder@utwente.nl
July 15, 2023
A BSTRACT
The execution process of share buybacks, a cornerstone of corporate finance strategy, presents a
series of distinctive anomalies that deviate from established financial theory. This study introduces
three such paradoxes—the Trading Schedule Anomaly, the Benchmark Paradox, and the Psycholog-
ical Misconception—and investigates their origins and implications.
The Trading Schedule Anomaly diverges from the typical intra-day trading structures, revealing
unanticipated timing and sequencing of trades during buybacks. The Benchmark Paradox, on the
other hand, questions the persistent use of a misguided benchmark in share buybacks, one that proves
easy to surpass but often leads to inflated costs and misaligned incentives. Lastly, the Psychologi-
cal Misconception highlights the role of cognitive biases, demonstrating how corporations become
satisfied with high costs under the fallacy of outperforming an inefficient benchmark.
We deploy a methodical combination of empirical investigation and innovative genetic algorithm
simulations to explore these anomalies. The outcomes of this research not only enhance our com-
prehension of share buybacks but also encourage a reconsideration of established norms within cor-
porate finance. By detailing the nature of these paradoxes and their potential impact on shareholder
value, we foster a deeper understanding of the complexities within buyback execution strategies.
Keywords: Share Buybacks, Corporate Finance, Trading Schedule Anomaly, Benchmark Paradox, Psychological
Misconception, Genetic Algorithm Simulations, Shareholder Value, Execution Strategies, Cognitive Biases, Empirical
Investigation
Electronic copy available at: https://ssrn.com/abstract=4511382

The Mysteries of Share Buyback Execution
Contents
1 Introduction 4
1.1 The Role and Relevance of Share Buybacks in Finance . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.2 The Identified Anomalies in Share Buyback Execution . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Objective and Approach of the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2 Literature Review 5
2.1 Basic Concepts and Frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 The Concept and Perception of Share Buybacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 Factors Influencing Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.4 Share Repurchases and Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.5 Information Signalling and Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.6 Impact and Consequences of Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.7 Dividends and Payout Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.8 Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.9 Corporate Financial Decisions and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.10 Managerial Perspectives and Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.11 Regulatory and Geographical Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.11.1 Regulatory Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.11.2 Geographical Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.11.3 Interaction of Regulatory and Geographical Factors . . . . . . . . . . . . . . . . . . . . . . . 14
2.12 Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.13 Elucidating the Research Gap: Trading Schedule Anomaly, Benchmark Paradox, and Psychological
Misconception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3 The Trading Schedule Anomaly 15
3.1 Trading Schedule Anomaly: Overview, Significance, and Empirical Examination . . . . . . . . . . . 15
3.2 Trading Schedule Anomaly: A Detailed Examination . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.3 Empirical Examination of the Trading Schedule Anomaly . . . . . . . . . . . . . . . . . . . . . . . . 17
3.4 Trading Schedule Paradox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4 The Benchmark Paradox 20
4.1 Understanding the Benchmark Paradox: Explanation and Impact . . . . . . . . . . . . . . . . . . . . 20

4.2 Effects of the Benchmark Paradox on Share Buybacks . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.3 Consequences and Implications of the Benchmark Paradox . . . . . . . . . . . . . . . . . . . . . . . 21
5 The Psychological Misconception 22
5.1 The Psychological Misconception: Explanation and Influence . . . . . . . . . . . . . . . . . . . . . . 22
5.2 The Nexus of Psychological Factors in Share Buyback Decisions . . . . . . . . . . . . . . . . . . . . 22
5.3 The Psychological Misconception’s Impact on Share Buybacks . . . . . . . . . . . . . . . . . . . . . 23
5.4 Discussion on Implications and Potential Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6 Optimizing Share Buyback Execution Using Genetic Algorithms 24
6.1 Introduction to Genetic Algorithms and Their Relevance to Share Buybacks . . . . . . . . . . . . . . 24
6.2 The Buyback Optimization Problem: A Closer Look . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.3 Designing the Genetic Algorithm: Selection, Crossover, and Mutation . . . . . . . . . . . . . . . . . 26
6.3.1 Initial Population Generation and the Notion of ’Fitness’ . . . . . . . . . . . . . . . . . . . . 26
6.3.2 Selection and the Survival of the Fittest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.3.3 Crossover: Combining the Best of Both Worlds . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.3.4 Mutation: Introducing Random Variations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.3.5 Iterative Evolution Towards an Optimal Solution . . . . . . . . . . . . . . . . . . . . . . . . 26
6.4 Applying the Genetic Algorithm to Share Buyback Optimization . . . . . . . . . . . . . . . . . . . . 27
6.5 Evaluating the Performance of the Genetic Algorithm . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.6 Implications and Future Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7 Discussion and Analysis 30
7.1 A Comprehensive Overview: Interlinking the Anomalies . . . . . . . . . . . . . . . . . . . . . . . . 30
7.2 Theoretical and Practical Implications of the Identified Anomalies . . . . . . . . . . . . . . . . . . . 31
7.3 Future Directions for Anomaly Research in Share Buybacks . . . . . . . . . . . . . . . . . . . . . . 32
8 Conclusion 32
8.1 Recap of Key Findings and their Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.2 Reflection on the Study’s Contribution to Share Buyback Execution . . . . . . . . . . . . . . . . . . 33
8.3 A Look Ahead: Anticipating Future Developments and Directions . . . . . . . . . . . . . . . . . . . 34

1 Introduction
This study explores the complex domain of share buybacks, a prominent tool in corporate finance strategy. Despite
their prevalent use in recent years for redistributing excess capital, enhancing perceived value, and optimizing capital
structures, share buybacks remain subject to controversy due to potential misuse and the intricacies of their execution.
In this study, we turn our attention to three particular anomalies observed within the execution process of share buy-
backs: the Trading Schedule Anomaly, the Benchmark Paradox, and the Psychological Misconception. Combining
a thorough empirical analysis with innovative simulations via genetic algorithms, we aim to unpack these anomalies,
thereby enhancing the understanding of share buyback practices. This investigation provides an opportunity to delve
into the nuances of these anomalies and explore potential areas for future research in this intricate facet of finance.
1.1 The Role and Relevance of Share Buybacks in Finance
Over recent decades, share buybacks have emerged as a key tool in the arsenal of corporate finance strategies. Firms
have increasingly turned to repurchasing their own shares as an efficient method of redistributing surplus capital to
shareholders, enhancing perceived value, and optimizing their capital structures.
In essence, share buybacks involve a corporation reacquiring its own shares from the open market. This tactic serves
to decrease the number of shares outstanding, thus potentially leading to an elevation of earnings per share (EPS)
provided corporate earnings remain steady. A higher EPS can, in turn, promote stock price appreciation, rendering
tangible benefits to shareholders. Furthermore, share buybacks can act as a counterweight to the dilution ensuing from
stock option exercises and serve as a signal of management’s confidence in future profitability.
Despite the widespread acceptance of share buybacks, they are not devoid of controversy. Detractors point to the
potential misuse of buybacks as a method of short-term EPS manipulation or as an indication of a dearth of productive
internal investment opportunities. Moreover, the practicalities of executing share buybacks open up complex questions
about market efficiency, corporate transparency, and investor fairness.
This study seeks to probe into the enigmatic aspects of share buybacks by focusing on three peculiar anomalies that
have surfaced in their execution - the Trading Schedule Anomaly, the Benchmark Paradox, and the Psychological
Misconception. To tackle this empirical puzzle, we apply a two-pronged approach that merges detailed empirical
analysis with innovative simulations using genetic algorithms. Our intention is to unpack these anomalies, investigate
their underpinnings, consider their implications, and propose potential strategies to mitigate their effects.
As we delve into the exploration of these anomalies, we invite the reader to consider the complexities of share buybacks
and the potential for further research in this intriguing facet of modern finance.
1.2 The Identified Anomalies in Share Buyback Execution
Our investigation has pinpointed three distinctive anomalies in the execution process of share buybacks. Each presents
a unique puzzle in the broader picture of corporate finance:
The Trading Schedule Anomaly: This anomaly arises from the unusual patterns seen in the timing and sequence of
trades conducted during share buybacks. These patterns often deviate from what traditional financial models would
suggest as optimal, hinting at a disconnect between theory and practice.
The Benchmark Paradox: Here, we turn our focus to the peculiar divergence between the intended and actual impacts
of benchmarks used in share buyback execution. Paradoxically, execution strategies designed to maximize shareholder
value under these benchmarks can sometimes lead to counterintuitive outcomes.
The Psychological Misconception: This anomaly addresses the role of cognitive biases in buyback decision-making.
It underscores the idea that human factors can and do influence financial decisions, bringing an element of unpre-
dictability to even the most calculated of corporate strategies.
These three anomalies each shed light on a unique aspect of share buyback execution that defies common financial
wisdom. Through analyzing these anomalies, we not only broaden our understanding of share buybacks themselves
but also open the door to new perspectives on corporate financial decision-making.

In the subsequent sections, we will undertake a more detailed examination of each anomaly, scrutinizing their charac-
teristics, their implications for financial theory and practice, and the potential remedies to alleviate their effects.
1.3 Objective and Approach of the Study
Our study sets out to delve into and understand the three distinct anomalies identified in share buyback execution. This
overarching objective consists of more refined aims that correspond with each anomaly.
1. Trading Schedule Anomaly:
• Objective: To delineate and measure this anomaly within the context of actual share buybacks.
• Approach: Our investigation commences with an empirical analysis of a dataset consisting of real-world
trading schedules, which forms the basis of our understanding of the anomaly. Following this, we employ
genetic algorithms to simulate optimal trading schedules under diverse conditions. By comparing these ideal
schedules with actual schedules, we aim to uncover the magnitude and potential causes of the anomaly.
2. Benchmark Paradox:
• Objective: To bring to light the disconnection between benchmark-oriented execution strategies and their
actual impacts on shareholder value.
• Approach: Our exploration is primarily empirical. We scrutinize historical data of share buyback executions,
particularly focusing on cases where adherence to benchmarks has resulted in unexpected outcomes. To
deepen our understanding, we compare these observations with standard intraday execution benchmarks,
thus establishing a clearer link between benchmark strategies and their potential drawbacks.
3. Psychological Misconception:
• Objective: To speculate on the extent to which cognitive biases may affect decision-making in share buy-
backs.
• Approach: For this anomaly, our approach is more exploratory. We consider various case studies of share
buyback decisions, indicating instances where psychological factors might have influenced the outcomes.
While we acknowledge potential explanations rooted in behavioral finance, our study does not delve deeply
into this aspect due to its speculative nature.
By combining empirical analysis and simulation techniques, we aim to shed light on these anomalies, each of which
adds a unique facet to the multifaceted domain of share buyback execution. By examining each anomaly both in-
dividually and in relation to one another, we aspire to enrich the current understanding and dialogue in corporate
finance.
2 Literature Review
In this section, we review the relevant literature concerning share buybacks. This review provides the necessary context
for our study by discussing the prevailing theories, empirical findings, and gaps in existing research. Through this
examination, we identify the unique contribution our research offers in the exploration of share buyback anomalies.
2.1 Basic Concepts and Frameworks
Share repurchases, as a form of corporate payout policy, are subject to various economic, financial, and strategic
factors. As the study of Ivashina (Ivashina & Scharfstein (2010)) and Bliss (Bliss et al. (2015)) underline, financial
crises and credit constraints may have a significant effect on a firm’s decision to repurchase shares. Brav (Brav
et al. (2005)) and Fenn (Fenn & Liang (2001)) also highlight the relevance of managerial incentives and corporate
governance in shaping the payout policy. Further, taxation and personal taxes, as discussed by Lie (Lie & Lie (1999))

and Jacob (Jacob & Jacob (2013)), have been identified as key determinants of corporate decisions regarding dividends
and share repurchases.
Share repurchase programs also have information content that impacts investor perception, as Grullon (Grullon &
Michaely (2004)) and Babenko (Babenko et al. (2012)) emphasize in their studies. They argue that repurchases could
be used as a signal to the market about the firm’s future prospects or as a tool to manage earnings. Moreover, repurchase
decisions can be influenced by the firm’s interaction with the capital market. Ikenberry (Ikenberry et al. (1995)), for
instance, discusses the concept of market underreaction to open market share repurchases.
Understanding the market and firm-level characteristics that lead to the execution of share repurchases has been another
core area of focus. Stephens (Stephens & Weisbach (1998)), Zhang (Zhang (2005)), and Ginglinger (Ginglinger &
Hamon (2007))) have delved into factors that drive the actual reacquisitions in open-market repurchase programs.
These factors include market liquidity, share price performance, and timing of the repurchase.
Further, share repurchases could serve strategic roles, like in the case of deterring takeovers, as Billett (?) observes.
The use of repurchases as a managerial tool to mislead investors is also addressed by Chan (Chan et al. (2010)). On
the other hand, other researchers like Bonaimé (Bonaimé & Ryngaert (2013)) and Hao (Hao (2016)) analyze insider
trading and information leakage in relation to share repurchases.
These considerations are encapsulated in a broader theoretical framework that dissects anomalies using a multi-factor
model, as proposed by Fama (Fama & French (2016)). The diversity of these perspectives underscores the multidi-
mensional and complex nature of the forces that drive share repurchases.
The practice of share buybacks has received substantial academic attention, exploring various dimensions such as their
motivations, implications, and market reactions. Share repurchases have become a significant method of payout for
U.S. corporations, often financed by funds that could have been used to increase dividends, suggesting a substitution
of repurchases for dividends Grullon & Michaely (2002).
Interestingly, the factors that drive dividend and share repurchase decisions diverge, as noted by Brav et al., 2005.
While maintaining the dividend level is comparable to investment decisions, repurchases are often made from the
residual cash flow following investment spending. Many managers now favor repurchases due to their perceived
flexibility and potential for market timing or increasing earnings per share Brav et al. (2005).
Share repurchases are not without their nuances, however. Stephens and Weisbach (1998) found that firms do not
always acquire the exact number of shares announced as repurchase targets. Repurchases are often influenced by
stock price performance and liquidity levels, suggesting that firms may increase their purchases depending on the
degree of perceived undervaluation and cash flow levels Stephens & Weisbach (1998).
The market’s reaction to open market share repurchases has been found to be an underreaction, especially in the
case of value stocks. Ikenberry et al. (1995) found that there is a significant abnormal return following repurchase an-
nouncements, which is more pronounced for value stocks, suggesting that the market tends to overlook the information
conveyed through repurchase announcements Ikenberry et al. (1995).
In contrast, the reaction to share repurchase announcements is generally more positive among firms that are more
likely to overinvest, with investors often underestimating the consequent decline in the cost of capital ?. Furthermore,
Fama (2016) found that positive exposures to profitability and conservative investment capture the high average returns
associated with share repurchases Fama & French (2016).
However, the use of stock options affects the decision to repurchase shares, with firms often announcing repurchases
when executives have large numbers of options outstanding. The repurchased amount is positively related to total
options exercisable by all employees, suggesting that managers might repurchase to fund employee stock option
exercises Kahle (2002).
From a regulatory standpoint, it has been observed that before 1983, regulatory constraints may have inhibited firms
from aggressively repurchasing shares Grullon & Michaely (2002). Meanwhile, Comment and Jarrell (1991) found
that Dutch-auction self-tender offers and open-market share repurchase programs are weaker signals of stock under-
valuation than fixed-price self-tender offers Comment & Jarrell (1991).
The impact of external shocks, like financial crises, on share repurchases also merits consideration. Ivashina and
Scharfstein (2010) found that during the 2008 financial crisis, new lending for restructuring (including share repur-

chases) fell considerably, demonstrating the influence of financial system disruptions on share repurchases Ivashina &
Scharfstein (2010).
2.2 The Concept and Perception of Share Buybacks
Share buybacks, or stock repurchases, are corporate practices involving the reacquisition of shares by the company
that initially issued them. This practice has steadily gained traction, mainly due to its flexibility and potential benefits,
including earnings per share (EPS) enhancement, excess cash distribution, undervaluation signaling, and alteration of
the company’s capital structure.
The paper by Brav et al. (2005) underscores the rise of share buybacks as a significant form of corporate payout in the
21st century. According to their findings, financial executives have favored this method due to its flexibility compared
to dividends. This flexibility can be seen in several aspects: timing, amount, and the decision to execute. A firm can
decide when to repurchase shares, how many to repurchase, and even if the repurchase is to occur at all, which provides
an advantage over dividends, which tend to be sticky and are generally expected to be consistent or increasing.
Executives’ perceptions of dividends and repurchases are noteworthy, with dividends often viewed as a ’sticky’ com-
mitment while repurchases are considered more flexible Brav et al. (2005). This perception can have significant
implications for payout policies and corporate finance decisions. For instance, firms may be more inclined to use
share repurchases as a cash disbursement method during periods of high earnings volatility due to the flexible nature
of buybacks.
This growing preference for share buybacks over dividends is corroborated by the research of Grullon & Michaely
(2002). The authors provide robust evidence indicating that share repurchases have become a prominent payout
method for U.S. corporations. They demonstrate that there has been a notable substitution of dividends with repur-
chases over time, and this trend could be attributed to several factors, including tax considerations and changes in
regulatory environments that have made repurchases a more attractive option.
In addition to the substitution hypothesis, share buybacks carry certain information about the firm’s future prospects.
Market reactions to buyback announcements provide interesting insights. For instance, the seminal paper by Ikenberry
et al. (1995) examines the long-term performance of firms following repurchase announcements. Their study suggests
that the market tends to underreact to repurchase announcements, particularly for ’value’ stocks, leading to significant
abnormal positive returns following the announcement. The potential reason behind this underreaction could be that
the market may interpret the buyback announcement as an undervaluation signal.
Nonetheless, it is essential to consider that the actual execution of announced buybacks is not guaranteed, and many
announced programs do not result in actual repurchases. Furthermore, the market reaction can vary based on the
specifics of the announcement and the company’s circumstances, indicating that market participants perceive repur-
chase programs in a nuanced way Ikenberry et al. (1995).
The literature on the concept and perception of share buybacks reveals that this corporate action has grown in popular-
ity and importance over the last decades, largely due to its flexibility compared to dividends. Executives and market
participants perceive share buybacks differently, and the market reaction to such announcements can provide valuable
insights into firms’ value and prospects.
2.3 Factors Influencing Share Repurchases
The decisions surrounding share repurchases are influenced by a myriad of factors ranging from financial and op-
erational characteristics of the firm to external environmental conditions and regulatory environments. A holistic
understanding of these factors is critical for studying the driving forces behind the trend of share repurchases.
One fundamental factor that motivates companies to buy back their own shares is the perceived undervaluation of their
stocks in the market, a concept elucidated in the seminal work of Ikenberry et al. (1995). According to their findings,
firms are more likely to announce buybacks when they believe their shares are undervalued, using it as a signaling
mechanism to convey positive information about the firm’s future prospects to the market. This approach hinges
on the firm’s superior information about its true intrinsic value, and the market subsequently corrects the perceived
undervaluation, leading to long-term positive abnormal returns after the repurchase announcement.

Another key determinant of share buybacks is excess cash and free cash flow availability within firms. Fenn & Liang
(2001) explores this relationship, noting that firms with substantial cash reserves are more likely to conduct share
buybacks, thereby returning excess cash to shareholders. This notion ties into the free cash flow hypothesis, which
suggests that firms with excess cash flows are prone to making suboptimal investment decisions. Thus, repurchasing
shares can help mitigate this potential agency problem by efficiently disbursing surplus cash.
It is also noteworthy that the regulatory environment and associated tax implications have a significant influence on
share repurchase decisions. As Grullon & Michaely (2002) indicates, the rise in popularity of share buybacks as
a payout method coincided with regulatory changes that made repurchases more favorable, especially the easing of
restrictions in the 1980s and changes in tax laws. Therefore, changes in the regulatory landscape can substantially
affect firms’ propensity to repurchase shares.
Managerial incentives and stock-based compensation also serve as key factors in the decision to repurchase shares.
Fenn & Liang (2001) highlight the influence of executive stock options on the decision to repurchase shares. When
executives are compensated with stock options, repurchasing shares can help offset the dilution that occurs when these
options are exercised, thereby enhancing the earnings per share and potentially increasing the stock’s value.
Another determinant in the literature is the firm’s capital structure and leverage. Almeida et al. (2016) find that
firms often use repurchases to reach their target leverage ratios, where repurchases increase leverage by reducing the
denominator (equity). This study showcases the use of share repurchases as a lever to adjust the capital structure in
favor of the firm’s target or optimal level.
The firm’s specific financial situation and economic environment also play a critical role in influencing repurchase
decisions. As Ivashina & Scharfstein (2010) and Bliss et al. (2015) suggest, the firm’s credit conditions and the
broader credit market environment during the 2008-2009 financial crisis substantially impacted firms’ payout policies,
including share repurchases. Firms facing adverse credit conditions or operating in tighter credit markets tend to
reduce share repurchases due to the higher opportunity cost of cash.
2.4 Share Repurchases and Financial Crisis
Understanding the relationship between share repurchases and financial crises offers critical insights into corporate
financial behavior under market distress. It highlights how firms adjust their payout policies in response to changes in
the financial landscape and the strategies they adopt to ensure survival and competitiveness.
A key piece of literature on this topic is the work by Ivashina & Scharfstein (2010), which examines the behavior of
bank lending during the 2008 financial crisis. The authors underscore the tightening credit conditions during the crisis
and show how this affected the corporate sector’s financial policies, including share repurchases. Firms, particularly
those heavily reliant on external financing, were compelled to scale back their repurchase activities due to reduced
access to capital and higher costs of borrowing. The effect was even more pronounced among firms with high leverage,
low cash reserves, and significant exposure to the crisis.
Bliss et al. (2015) further delve into the impact of the financial crisis on corporate payout policies. The study reveals
a significant decline in firms’ share repurchases and dividends following the crisis. This can be attributed to firms’
increased need for cash retention to buffer against the uncertainties and financial distress caused by the crisis. Further-
more, it was observed that firms that continued to make payouts amidst the crisis were those with better access to the
credit market, indicating the crucial role of credit conditions in determining firms’ payout decisions during financial
crises.
In the same vein, Almeida et al. (2016) examine the real effects of share repurchases during crises. They contend that
the substantial decline in share repurchases during the 2008 financial crisis contributed to the decrease in aggregate
investment and employment. This illustrates the potential macroeconomic implications of changes in corporate payout
policies during financial crises. Additionally, firms that made large repurchases before the crisis suffered greater
investment and employment drops, suggesting that previous repurchasing decisions can exacerbate firms’ vulnerability
to economic downturns.
The influence of corporate governance on firms’ payout policies during crises is another important aspect. Hu &
Kumar (2004) explore the relationship between managerial entrenchment and payout policy, arguing that entrenched
managers may resist cutting payouts during financial crises to signal firm strength. However, such actions might

adversely affect the firm’s long-term survival and competitiveness, especially when the funds could be better used to
shore up the firm’s financial position.
A notable exception to the trend of reduced payouts during crises is explored in the study by Billett & Xue (2007). They
argue that some firms might increase share repurchases during financial crises to exploit market undervaluations and
consolidate their control, thereby deterring potential takeover threats. Such a strategy could be beneficial in situations
where the firm’s stock is significantly undervalued due to the crisis, and the management believes in the firm’s ability
to weather the storm.
The financial crisis significantly impacted share repurchases, with most firms reducing such activities due to tightened
credit conditions and the need for cash conservation. However, specific firm characteristics and strategic considerations
may lead to divergent behaviors. The role of share repurchases during financial crises, therefore, presents an intricate
interplay between market conditions, corporate strategy, and governance structure.
2.5 Information Signalling and Share Repurchases
One of the most important theories explaining the rationale for share repurchases is the information signaling hypoth-
esis. It posits that managers may resort to share repurchases to convey private, positive information about the firm’s
future prospects to the market, especially when they believe their stock is undervalued.
In one of the earliest comprehensive studies on this subject, Ikenberry et al. (1995) demonstrated that the market tends
to underreact to open market share repurchases. Their analysis suggested that such repurchases serve as a credible
signal of the firm’s undervaluation, leading to significant long-term positive abnormal returns. This finding aligns with
the signaling theory by indicating that managers, equipped with superior information about the firm, initiate share
repurchases when they perceive a discrepancy between the firm’s intrinsic and market values.
A further study by ? contributes to this line of research by investigating the information content of share repurchase
programs. The authors found that firms conducting repurchases experience an increase in future earnings, consistent
with the argument that repurchases are initiated by managers who have positive private information about the firm’s fu-
ture profitability. This implies that share repurchases can indeed be an effective tool for conveying private information
to the market.
The relative signaling power of different methods of share repurchases is analyzed in the study by Comment & Jar-
rell (1991). The authors argue that Dutch-auction self-tender offers convey a stronger signal about firm value than
fixed-price self-tender offers and open-market repurchases. This indicates that the method of repurchasing shares
can influence the strength of the signal sent to the market, providing another layer of complexity to the signaling
hypothesis.
Stephens & Weisbach (1998) offers a more nuanced perspective on the relationship between share repurchases and
information signaling. They found that while announcements of open-market repurchase programs lead to positive
abnormal returns, many firms do not follow through on their repurchase announcements. This suggests that some firms
might use repurchase announcements purely as a signaling mechanism without intending to carry out the repurchases,
calling into question the credibility of such signals.
The role of share repurchases in signaling firm value can also have broader market implications, as shown by Pontiff
& Woodgate (2008). The authors contend that new share issuance is associated with lower future returns, implying
that share repurchases (as the opposite of issuance) could be associated with higher future returns. This reinforces the
signaling theory by suggesting that firms repurchase shares when they anticipate future increases in their stock prices.
The signaling theory suggests that share repurchases can act as an effective mechanism for managers to convey positive
private information to the market. However, the credibility of these signals and the market’s interpretation of them
can be influenced by several factors, including the method of repurchase and the firm’s track record in fulfilling
repurchase announcements. This multifaceted role of share repurchases in information signaling underscores the need
for investors to consider these factors when interpreting repurchase decisions.

2.6 Impact and Consequences of Share Repurchases
The decision by a firm to repurchase its own shares can have significant ramifications, affecting a range of stakeholders,
the firm’s financial health, and the overall market dynamics.
An immediate consequence of share buybacks is the modification of the firm’s capital structure. By reducing the num-
ber of shares outstanding, a company increases its earnings per share (EPS), assuming net income remains constant.
This, in turn, may enhance the company’s perceived financial performance and boost its stock price Fama & French
(2016).
Share buybacks also impact the firm’s dividend policy. ? examined the substitution hypothesis, suggesting that
companies often use share repurchases as an alternative to dividends. They found a negative relationship between
repurchases and dividends, implying that firms that repurchase more shares pay fewer dividends. This may be due to
the flexibility of repurchases over dividends, which require a commitment to consistent payments.
Fenn & Liang (2001) linked share repurchases to managerial incentives. They found that when managers’ compensa-
tion is heavily reliant on stock options, firms tend to favor share buybacks over dividends. This is because repurchases
can increase the stock price, thereby making stock options more valuable.
The study by Custódio & Metzger (2014) further illustrates the role of managerial expertise in determining a firm’s
payout policy. They found that CEOs with financial expertise are more likely to use share repurchases, reinforcing the
influence of managerial characteristics on repurchase decisions.
Moreover, the geographical location of the firm also influences the likelihood of share buybacks, as shown by John et
al. (2011). Firms located in areas with more transient institutional investors are more likely to conduct share buybacks,
revealing the influence of investor characteristics on a firm’s payout policy.
Repurchase decisions also have implications for the firm’s ability to weather financial distress. Bliss et al. (2015)
demonstrated that firms that repurchased more shares before the 2008-2009 financial crisis retained less cash and
faced a tighter credit supply during the crisis. This suggests that share buybacks can restrict the firm’s financial
flexibility during times of economic downturn.
Further, the study by Almeida et al. (2016) investigates the real effects of share repurchases. The authors found that
firms conducting repurchases reduce their investments and employment, indicating that share buybacks may lead to a
contraction in firm size.
Lastly, share buybacks can influence the firm’s susceptibility to takeover attempts. Billett & Xue (2007) found that
open market repurchases deter takeover attempts, suggesting that repurchases can serve as a strategic tool for firms to
preserve their independence.
The impact and consequences of share buybacks are wide-ranging, affecting the firm’s financial health, managerial in-
centives, payout policy, ability to withstand financial distress, investment and employment decisions, and susceptibility
to takeovers.
2.7 Dividends and Payout Policies
Firms have different methods of distributing earnings to shareholders, with dividends and share repurchases being the
most common (Brav et al. (2005)). Firms can choose between these two payout methods depending on the company’s
current status, their financial capacity, and market conditions. The choice between dividends and share repurchases
can have different impacts on both the firm and its shareholders (Grullon & Michaely (2002)).
Dividend policy has been a subject of considerable debate, with factors such as profitability, size, and business risk
being identified as significant determinants (Leary & Michaely (2011)). Dividends can be smoothed over time to
maintain a predictable pattern, thereby reducing information asymmetry and agency costs (John et al. (2011)). On the
other hand, some firms adopt flexible dividend policies, with payout ratios varying significantly over time (Fenn &
Liang (2001)).
Share repurchases have gained popularity as an alternative to dividends since they offer more flexibility (Stephens &
Weisbach (1998)). Repurchases allow firms to distribute cash when they have excess cash flow, and withhold cash
10

when necessary. They also allow firms to adjust their capital structure, offset dilution from employee stock options,
and signal positive information about future prospects (Ikenberry et al. (1995)). However, the use of share repurchases
can also be influenced by managerial incentives (Hu & Kumar (2004)) and market conditions (Ivashina & Scharfstein
(2010)).
Both dividends and share repurchases can be influenced by tax considerations. Dividends are usually taxed at higher
rates than capital gains, which can be a reason for firms to prefer share repurchases (?). However, tax considerations
can also be affected by the institutional environment, and different countries have different tax regimes affecting the
choice between dividends and repurchases (Jacob & Jacob (2013)).
There are also other factors influencing payout policy, such as firm location (John et al. (2011)), financial constraints
(S.-S. Chen & Wang (2012)), managerial incentives (Fenn & Liang (2001)), and the supply of credit (Bliss et al.
(2015)).
2.8 Share Repurchases
Share repurchases have been a popular method of returning capital to shareholders, offering an alternative to dividends
(Brav et al. (2005)). Corporations engage in share repurchases for various reasons such as altering the firm’s capital
structure, distributing surplus cash, managing the firm’s stock price, and signaling management’s confidence in the
company’s future prospects (Ikenberry et al. (1995); Brav et al. (2005); Grullon & Michaely (2002); Stephens &
Weisbach (1998)).
The wealth effects of share repurchases have been examined extensively in the literature (Bradley & Wakeman (1983);
Klein & Rosenfeld (1988b)). Bradley (1983) provided evidence that targeted share repurchases generate positive
abnormal returns, while Klein (1988) discussed the impact of these repurchases on non-participating shareholders.
Furthermore, it has been found that share repurchases can act as a takeover defense, serving to deter potential acquirers
(?Sinha (1991)).
However, there are certain complexities and potential distortions linked to share repurchases. For instance, they can
be used as a tool to manipulate market perception (Chan et al. (2010)), mislead investors, and even camouflage the
dilution of shares due to employee options (Kahle (2002)). Furthermore, a debate exists on the efficacy of share
repurchases in the presence of financial constraints (S.-S. Chen & Wang (2012); ?); Ivashina & Scharfstein (2010)).
Share repurchase announcements could be associated with a higher degree of information asymmetry and could be
impacted by CEO overconfidence (Andriosopoulos et al. (2013)). Empirical evidence suggests that firms tend to
repurchase more shares when managers believe their stock is undervalued (Liu & Swanson (2016)). In addition,
managers might time the repurchases according to perceived market conditions and the firm’s current share price
(Stephens & Weisbach (1998); ?). This timing behavior has implications for corporate liquidity (Brockman & Chung
(2001)) and could potentially be driven by various factors such as surplus cash, agency problems (Oswald & Young
(2008)), or even peer influence (Adhikari & Agrawal (2018)).
The relationship between share repurchases and payout policy has also received considerable attention (Grullon &
Michaely (2002); Fenn & Liang (2001); Hu & Kumar (2004); Leary & Michaely (2011)). The substitution hypothesis
posits that share repurchases and dividends can be used interchangeably to distribute cash to shareholders (Grullon &
Michaely (2002)). However, the choice between share repurchases and dividends may depend on various firm-specific
factors including financial constraints, investment opportunities, managerial incentives, and tax considerations (Fenn
& Liang (2001); Hu & Kumar (2004); Lie (2005); Jacob & Jacob (2013)).
Taxation plays a significant role in the decision-making process between dividends and share repurchases (Lie & Lie
(1999); Jacob & Jacob (2013)). In particular, in some jurisdictions, dividends may be subject to higher tax rates than
capital gains, making share repurchases a more tax-efficient method of returning capital to shareholders (Jacob &
Jacob (2013)). The interplay of taxation and ownership structure could further influence the choice of payout policy
(Henry (2011); Pindado & De La Torre (2006)).
The literature has explored the potential impacts of share repurchases on future earnings growth (Ping & Ruland
(2006)), stock price volatility (Ackert & Smith (1993)), stock market liquidity (Brockman, Howe, & Mortal (2008);
Hillert et al. (2016)), and systematic risk (Denis & Kadlec (1994)). Moreover, share repurchases could affect corporate
financial policies in multiple ways (Rapp et al. (2014); Custódio & Metzger (2014)) and may even result in altering a
firm’s capital structure (Brav et al. (2005)).
11

2.9 Corporate Financial Decisions and Policies
Corporate financial decisions and policies play a pivotal role in firm growth and development. These decisions encom-
pass a wide range of actions, such as share repurchases, dividend policies, managerial incentives, and more.
Share Repurchases
Share repurchases are a key aspect of corporate financial decisions. They allow companies to return excess cash to
shareholders while maintaining flexibility in their capital structure (Baker et al. (2002)). However, the credibility of
open market share repurchase signaling is a point of contention (Babenko et al. (2012)). Several scholars argue that
share repurchases can be used as a potential tool to mislead investors (Chan et al. (2010)). Others have observed
a positive correlation between share repurchases and future earnings growth (Ping & Ruland (2006)). Repurchases
have also been linked to the liquidity of a firm’s stock (Hillert et al. (2016)), while their impact on managerial stock
incentives has been documented as well (Fenn & Liang (2001)).
Dividend Policies
Firms can also return excess cash to shareholders through dividends. The decision to distribute dividends is often
related to a firm’s earnings, with higher earnings leading to increased dividends (Leary & Michaely (2011)). Dividend
policies can also be affected by geographical factors (John et al. (2011)). Interestingly, several scholars have posited
that there is a substitution effect between dividends and share repurchases (Grullon & Michaely (2002)). Additionally,
changes in corporate payout policies can sometimes serve as a defense against takeovers (DENIS (1990)).
Managerial Incentives
The structure of managerial incentives can also affect corporate financial decisions. For example, executives with
higher stock incentives may be more likely to repurchase shares (Hu & Kumar (2004)). The work experience of CEOs
can also influence a firm’s financial policies (Custódio & Metzger (2014)).
Impact of Financial Constraints and Financial Crisis
Financial constraints can also play a significant role in shaping a firm’s financial decisions, such as share repurchases
(S.-S. Chen & Wang (2012)). The 2008 financial crisis, for example, had a profound impact on corporate payout, cash
retention, and the supply of credit (Bliss et al. (2015)).
Tax Considerations
The effect of taxation on corporate decisions, including dividends and share repurchases, has been extensively re-
searched (Lie & Lie (1999); Jacob & Jacob (2013)). Taxation can influence payout policy, particularly in regions with
tax-friendly dividends (Henry (2011)). The possibility of reform in the territorial tax system can also significantly
impact corporate financial policies (Arena & Kutner (2015)).
2.10 Managerial Perspectives and Behavior
Managerial perspectives and behaviors significantly influence a firm’s decision to engage in share repurchases. Man-
agers are often challenged with the task of balancing the benefits and drawbacks of share repurchases, as well as
determining the most optimal timing and methods for these actions.
Managerial behavior and incentives are important factors that influence the decision to repurchase shares. Managers
may use share repurchases as a means to increase the firm’s stock price in the short-term, thereby boosting their
personal financial incentives (Fenn & Liang (2001); Hu & Kumar (2004); Babenko (2009)). This perspective can
lead to repurchase decisions that may not necessarily align with the long-term interests of the firm or its shareholders.
For instance, some research suggests that repurchases can be used as a tool to mislead investors about the firm’s true
financial health (Chan et al. (2010)).
In terms of payout policy, managers may view repurchases as a more flexible option compared to dividends. Dividends
are typically expected to be maintained or gradually increased, and a reduction or omission of dividends may be
negatively perceived by the market (Baker et al. (2002); Leary & Michaely (2011)). Share repurchases do not carry
the same expectations, and can be more easily adjusted based on the firm’s financial situation and market conditions
12

(Grullon & Michaely (2002); Bliss et al. (2015)). Additionally, some research suggests that managers may prefer
repurchases due to personal tax advantages (Lie & Lie (1999); Green & Hollifield (2003); Jacob & Jacob (2013)).
Managers must also consider the firm’s financial constraints when deciding on repurchases. For instance, firms may
opt for repurchases when they have excess cash and low investment opportunities (S.-S. Chen & Wang (2012); ?);
Boudry et al. (2013)). On the other hand, during periods of financial stress, such as the 2008 financial crisis, firms may
reduce share repurchases due to the higher demand for internal funds and the reduced supply of external financing
(Ivashina & Scharfstein (2010); Bliss et al. (2015)).
Managerial decisions on share repurchases are also influenced by their perceptions of the firm’s stock price. If man-
agers believe that the firm’s stock is undervalued, they may initiate a repurchase to signal their confidence in the firm’s
future prospects to the market (Ikenberry et al. (1995); Babenko et al. (2012); Liu & Swanson (2016)). However, the
ability of managers to successfully time the market remains a topic of debate (Chan et al. (2007); Brockman & Chung
(2001); Baker et al. (2003)).
2.11 Regulatory and Geographical Factors
The interplay between regulatory and geographical factors significantly influences corporate decisions on share repur-
chase policies. The legal environment within which a company operates may facilitate or constrain the implementation
of share repurchase programs, while geographic factors often affect the company’s financial flexibility and economic
exposure.
2.11.1 Regulatory Environment
Companies are subject to a myriad of regulations and legal structures depending on their jurisdiction of operation.
These legal frameworks often have a direct influence on a company’s ability to engage in share repurchase activi-
ties (Andriosopoulos & Hoque (2013)). For example, the regulatory environment may affect the methods by which
companies can repurchase shares, including open market purchases, tender offers, and private negotiations (?).
Regulations also play a significant role in determining the financial reporting and disclosure requirements associated
with share repurchases (Brockman, Khurana, & Martin (2008)). This can include information about the timing and
magnitude of repurchases, the price paid for repurchased shares, and the company’s intentions regarding the repur-
chased shares (Grullon & Michaely (2004)).
Some studies highlight the role of regulatory changes in influencing corporate payout policies. For instance, regulatory
reforms favoring share repurchases can lead to an increase in such practices, especially when these reforms reduce the
potential cost of repurchasing shares (Bargeron et al. (2011)). On the other hand, restrictive regulations, such as those
limiting the amount or rate of share repurchases, can dampen the use of share repurchases as a payout method (Baker
et al. (2003)).
2.11.2 Geographical Factors
Geographical factors also affect share repurchase decisions. John and Leary (2011) argue that geographical character-
istics of firms, such as their proximity to financial centers and the local business climate, significantly affect corporate
payout policies (John et al. (2011)). For instance, companies located near major financial centers may have better
access to capital markets, making it easier for them to raise funds for share repurchases (John et al. (2011)). In con-
trast, firms operating in regions with less developed financial markets may find it more challenging to engage in share
repurchase activities.
Local economic conditions can also influence share repurchase decisions. Companies operating in economically
prosperous regions may generate higher profits, providing them with more resources for share repurchases (Fenn &
Liang (2001)). However, during periods of economic downturn, these firms might reduce share repurchase activities
due to diminished profitability and heightened financial constraints (Bliss et al. (2015)).
Moreover, cultural factors associated with a company’s geographical location can influence corporate payout policies.
Certain cultures might favor share repurchases due to their perceived advantages, such as increasing earnings per share
13

and improving stock price performance (Ikenberry et al. (1995)). In contrast, other cultures may prefer dividends as a
more traditional and stable form of returning capital to shareholders (Baker et al. (2002)).
2.11.3 Interaction of Regulatory and Geographical Factors
Interestingly, regulatory and geographical factors can interact in influencing corporate payout policies. For instance,
regulatory environments can differ significantly across regions, leading to geographical variations in the usage of share
repurchases (Andriosopoulos & Hoque (2013)). A company’s decision to repurchase shares may thus reflect both its
adherence to local regulatory requirements and its response to the local economic and cultural context (Renneboog &
Trojanowski (2011)).
On a broader scale, multinational corporations operating in multiple jurisdictions need to navigate various regulatory
environments and diverse cultural contexts. They must balance their corporate payout policies to meet the expectations
of global shareholders and conform to local regulations and norms (B. Lee & Suh (2011)). In this way, the global
dimension adds another layer of complexity to the interactions between regulatory and geographical factors in shaping
corporate payout policies (Manconi et al. (2019)).
2.12 Tax Considerations
One of the major factors affecting share repurchase decisions is the tax implications. Corporations and shareholders
alike need to consider how taxes impact their choices about distributing and receiving profits. The study by (Lie & Lie
(1999)) provides a comprehensive analysis of the role of personal taxes in corporate decisions about share repurchases
and dividends, indicating that taxation can significantly influence these choices.
A similar study by (Jacob & Jacob (2013)) took this analysis global, confirming that the tax considerations hold
even when examining dividends and share repurchases across different countries with varied taxation structures. Tax-
friendly dividends can play a significant role in shaping a corporation’s ownership structure, as (Henry (2011)) demon-
strated.
In the context of a changing taxation landscape, (Korkeamaki et al. (2010)) scrutinized the effects of tax reform on
payout policy. The research findings suggested that tax reform can lead to adjustments in payout policies or shareholder
clienteles.
However, the tax benefits of equity should not be neglected. (Green & Hollifield (2003)) showed that equity has
certain personal-tax advantages, which can potentially offset the tax implications of share repurchases or dividends.
This dynamic highlights the importance of considering the whole financial picture when making corporate decisions.
In addition to individual tax implications, corporations must consider the effects of global and national tax policy
reforms. For example, (Arena & Kutner (2015)) provided evidence of how reforms to territorial tax systems can affect
corporate financial policies, including decisions about share repurchases.
In the next subsection, we aim to further delineate the research gap related to our identified anomalies: the Trading
Schedule Anomaly, the Benchmark Paradox, and the Psychological Misconception.
2.13 Elucidating the Research Gap: Trading Schedule Anomaly, Benchmark Paradox, and Psychological
Misconception
Addressing research gaps is of paramount importance in advancing the domain of financial theory, and it’s especially
pertinent when dealing with the complex dynamics of share buybacks. In relation to our identified anomalies: the
Trading Schedule Anomaly, the Benchmark Paradox, and the Psychological Misconception, there are specific gaps in
the existing literature that warrant further examination.
The Trading Schedule Anomaly represents an intricate yet unexplored aspect of share buybacks. Despite its profound
implications for capital markets, scant literature exists on the nature and origin of these trading schedules. While
our research has underscored the potential role of advanced optimization algorithms in formulating these schedules,
a comprehensive understanding of this process remains elusive. Further investigation into the specific algorithms
employed, and how these are adapted in response to shifting market conditions, is a rich area for future research.
14

In relation to the Benchmark Paradox, the consistently exceptional performance of brokers in outpacing the buyback
benchmark raises intriguing questions about market efficiency. Existing literature offers limited insight into this phe-
nomenon. The role of algorithmic strategies and the potential manipulation of structural features of the benchmark
have been largely unaddressed in academic discourse. This gap presents a fertile ground for future study, with the
potential to challenge and enhance our understanding of market efficiency.
Lastly, the Psychological Misconception sheds light on the puzzling satisfaction derived by corporate entities from
their share buyback operations. Despite the anomalies associated with trading schedules and benchmarking, corpora-
tions display a consistent sense of contentment with their buyback outcomes. This anomaly appears to be driven by
cognitive biases and psychological gratification rather than rational economic decision-making. A deeper investigation
into these biases, and their influence on corporate decision-making in the context of share buybacks, is largely absent
in the current body of research, thus highlighting another significant gap.
Our work has unearthed a triad of anomalies in share buyback execution that expose substantial gaps in the existing
literature. These gaps underscore the need for future research, encompassing rigorous mathematical modelling, a
deeper understanding of market efficiency, and an exploration into the intriguing realm of behavioral finance. The
pursuit of these areas promises to yield further insights into the complexities of share buybacks and their role in the
broader financial landscape.
3 The Trading Schedule Anomaly
Share buybacks, a complex process subject to meticulous execution, are governed by trading schedules that dictate
the tempo and sequencing of trades. The pertinence of these trading patterns is paramount, as they can potentially
influence the efficiency and efficacy of the buyback process. Theoretical financial models suggest optimal trading
schedules to maximize shareholder value while minimizing market disturbances. Yet, a notable disparity between
these theoretical models and real-world practices has emerged, giving rise to an intriguing occurrence we refer to as
the "Trading Schedule Anomaly".
Our comprehensive study presents an empirical examination of this anomaly and brings to light two distinctive trading
patterns that challenge the established norms. This divergence from theoretical schedules provides compelling evi-
dence of the anomaly, motivating further exploration into its causes and implications. This analysis seeks to inform
more effective financial strategies, shape regulatory guidelines, and enrich the discourse in corporate finance.
3.1 Trading Schedule Anomaly: Overview, Significance, and Empirical Examination
The trading schedule, serving as the blueprint for share buyback executions, meticulously orchestrates the sequence
and timing of trades. The established trading pattern is of paramount importance as it not only facilitates the buyback
process but also impacts its overall efficiency and effectiveness. Theoretically, financial models propose optimal trad-
ing schedules that strive to amplify shareholder value while minimizing market disturbances. However, an intriguing
anomaly has surfaced: real-world buyback executions deviate significantly from these theoretically optimal schedules,
giving rise to what we term the "Trading Schedule Anomaly".
This anomaly, transcending mere academic interest, holds substantial practical implications. Deviations from the opti-
mal trading schedules may inadvertently escalate trading costs, instigate unpredictable share price volatility, and induce
potential disruptions in market equilibrium. Furthermore, these irregularities could distort the signals that a buyback
sends to the market, potentially leading to misinterpretations of the firm’s financial health and future prospects. This
could further impact the firm’s cost of capital and the overall functionality of the capital markets.
In light of these implications, a detailed understanding of the Trading Schedule Anomaly is critical. Not only does it
challenge existing financial model assumptions, but it also provides the groundwork for refining buyback strategies,
enhancing regulatory guidelines, and ensuring clearer market signals.
Empirical evidence suggests a wide chasm between established financial models and actual corporate practices. De-
spite the commonly accepted benchmarks such as Time-Weighted Average Price (TWAP), Volume-Weighted Average
Price (VWAP), and Percentage of Volume (POV) that are designed to reduce transaction costs and market impact while
maximizing shareholder value, firms often exhibit a disregard for these benchmarks during execution. Instead, they
opt for seemingly erratic trading schedules.
15

Our empirical investigation of the Trading Schedule Anomaly involved a rigorous analysis of share buyback executions
across a myriad of firms. A diverse dataset was utilized that encompassed various industries, company sizes, and
regulatory environments. This broad data collection allowed us to probe the timing and sequence of share repurchases
in an unprecedently comprehensive manner.
Two distinct patterns emerged from the data that serve to exemplify the anomaly. The first pattern displayed firms
conducting the bulk of their repurchases in the initial half of the buyback period, subsequently reducing the pace of
trading activity. A stark example of this pattern involved a firm executing approximately 90% of the entire repurchase
volume in the first 50% of the allocated time. Such a trading pattern sharply contrasts with benchmarks such as VWAP
and TWAP, which advocate for evenly distributed trading schedules.
The second pattern presented a contrasting scenario where firms displayed a significant delay in starting their repur-
chase activities, choosing to engage in a considerable flurry of trading activity closer to the end of the buyback period.
For instance, a firm chose not to execute any trades for the initial half of the buyback period, only to quickly complete
the entire buyback order over the remaining half of the period. This pattern of execution presents a stark contrast to
the POV strategy.
In essence, the empirical patterns underscore a significant deviation from established intraday execution profiles and
provide compelling evidence of the Trading Schedule Anomaly. These unusual patterns suggest that firms executing
share buybacks might be operating under a set of considerations that deviate from traditional market impact and cost
considerations. The discrepancy between theory and practice warrants further investigation to uncover the underlying
drivers of these trading schedules. The insights gained from our analysis could provide valuable insights for corporate
financial strategy and contribute to an enriched dialogue in the domain of corporate finance.
3.2 Trading Schedule Anomaly: A Detailed Examination
The execution of share buybacks, largely governed by the trading schedule, unfolds in a precisely timed sequence.
This execution sequence is no minor detail: it is essential for enhancing the buyback’s efficiency, maintaining share
price stability, and providing clear signals to the market. Despite this, a perplexing phenomenon arises in the form
of the "Trading Schedule Anomaly" — a notable divergence between the trading schedules proposed by theoretical
financial models and those seen in practice.
Such an anomaly is not merely of academic interest, but carries substantial practical implications. Adherence to
an optimal trading schedule minimizes trading costs and mitigates the potential for market disruptions. Deviations,
therefore, can lead to escalated costs, increased share price volatility, and a distorted market perception of the firm’s
financial condition. This may, in turn, affect the cost of capital, the functioning of capital markets, and ultimately,
shareholder value.
Our understanding of this anomaly, therefore, is critical not only for challenging the assumptions inherent in existing
financial models but also for shaping more effective buyback strategies, informing regulatory guidelines, and enhanc-
ing market transparency.
Despite theoretically optimal intraday execution profiles such as Time-Weighted Average Price (TWAP), Volume-
Weighted Average Price (VWAP), and Percentage of Volume (POV), which are designed to reduce transaction costs
and market impact while enhancing shareholder value, our empirical examination uncovers a noticeable divergence in
actual practices.
For our empirical examination, we used a comprehensive dataset, reflecting a broad spectrum of firms across various
industries and regulatory environments. Our analysis provides clear evidence of the Trading Schedule Anomaly and
reveals two starkly different trading patterns.
Firstly, some firms execute the majority of their share repurchases in the initial half of the buyback period, then
significantly decelerate the trading activity. In one instance, a firm executed roughly 90% of the total repurchase
volume within the first half of the allocated time frame. This conduct contrasts sharply with benchmarks such as
VWAP and TWAP, which recommend even distribution of trades over the period.
The second pattern reveals a different approach: firms delay initiating their repurchase activity, opting instead for a
burst of trading activity towards the end of the buyback period. We observed a firm abstaining from any trading during
the initial half of the buyback period, only to swiftly execute the entire buyback order in the remaining half. This
16

strategy starkly contrasts with the POV profile, which promotes a trading schedule proportional to the market’s trading
volume.
These patterns clearly demonstrate a marked deviation from traditional intraday execution profiles, offering compelling
evidence of the Trading Schedule Anomaly. The discrepancy between theoretical models and practical implementation
implies that firms conducting share buybacks may operate under considerations beyond traditional market impact and
cost minimization. Understanding these underlying drivers warrants further research, and the insights gained will
undoubtedly contribute to the discourse in corporate finance and inform more effective financial strategies.
3.3 Empirical Examination of the Trading Schedule Anomaly
Our in-depth empirical examination of the Trading Schedule Anomaly necessitated a thorough analysis of share buy-
back executions from a broad spectrum of firms. We utilized a diverse dataset encompassing different industries,
company sizes, and regulatory environments. Through this meticulous data collection and subsequent analysis, we
could scrutinize the timing and sequence of share repurchases in an unprecedented manner. The overarching pattern
that emerged was an ostensible deviation from the widely established intraday execution profiles, such as the Volume
Weighted Average Price (VWAP), Time Weighted Average Price (TWAP), and Percentage of Volume (POV).
As these established execution profiles act as the guiding light for most trading activities, a divergence from them
naturally raises eyebrows. VWAP, for example, aims to distribute the trading activity throughout the day to minimize
market impact and reduce transaction costs. It does so by matching the pace of trades to the market’s volume. Similarly,
TWAP is another execution strategy that spreads trades evenly across a specified period to avert substantial price shifts.
POV, on the other hand, entails setting the trading pace proportional to the volume of shares traded in the market,
thereby also minimizing market impact.
However, our investigation exposed two markedly different patterns that challenge the conventional execution wisdom
embedded in these trading profiles. These patterns may represent the ’Trading Schedule Anomaly’ and provide insights
into its intricate dynamics.
In the first pattern, we found that a significant proportion of firms performed the lion’s share of their repurchases in the
initial half of the buyback period, subsequently reducing the pace of trading activity. A stark example of this pattern
involved a firm executing approximately 90% of the entire repurchase volume in the first 50% of the allocated time.
In other words, while one would anticipate a more balanced schedule, the firm front-loaded the majority of trades and
then tapered its trading for the remaining half of the period. Such a trading pattern starkly diverges from benchmarks
such as VWAP and TWAP, which advocate for an evenly distributed trading schedule to minimize market impact and
spread transaction costs effectively.
The second pattern, though no less surprising, presents a contrast to the first. Here, firms demonstrated a considerable
delay in starting their repurchase activities, instead engaging in a significant flurry of trading activity closer to the
end of the buyback period. A striking example of this pattern involved a firm that chose not to execute any trades
for the initial half of the buyback period. Instead, it moved to quickly complete the entire buyback order over the
remaining half of the period. This pattern of execution presents a contrast to the POV strategy, which encourages a
trading schedule that is proportional to the market’s trading volume. By opting for such an unusual schedule, firms
seemingly eschew the benefits that the POV strategy offers, such as minimized market impact.
These empirical patterns provide compelling evidence of the Trading Schedule Anomaly and underline the notable
discrepancy between established theory and practical execution in the realm of share buybacks. While established
benchmarks such as VWAP, TWAP, and POV are designed to balance market impact with transaction costs efficiently,
the observed trading schedules indicate a different decision-making approach. These patterns suggest that firms exe-
cuting share buybacks might be influenced by a set of considerations that deviate from traditional market impact and
cost considerations.
The depth of the divergence from established intraday execution profiles raises several significant questions that we
aim to explore in subsequent sections of this study. Why do firms opt for such irregular trading schedules when
established profiles offer clear benefits? What could be the underlying drivers that compel these firms to adopt such
unique trading schedules? Could these patterns be indicative of other, more profound issues in the share buyback
execution process? Our investigation continues in the direction of these queries, seeking to shed light on the causes
and potential implications of the Trading Schedule Anomaly. As part of this pursuit, our subsequent section presents
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Figure 1: Trading profile of a real share buyback execution: Case Study 1
a genetic algorithm simulation study aimed at replicating these anomalies, providing deeper insights into their roots,
and unearthing the implications of such deviations.
3.4 Trading Schedule Paradox
In our analysis, we have uncovered two instructive case studies that demonstrate the pervasive anomaly in trading
schedules, which we refer to as the ’Trading Schedule Paradox.’ These studies highlight the often significant di-
vergence from theoretically optimized execution schedules during share buybacks, ultimately leading to financial
inefficiencies that could be materially significant for corporations.
Case Study 1:
Our first case study is illustrated in Figure 1, which displays a trading profile of an actual share buyback execution.
Notably, we find that a disproportionate 90% of the buyback volume is executed within the initial 90 days. The
remaining 10% of the volume is stretched over the subsequent 90 days, an execution schedule that deviates markedly
from typical trading profiles.
Further investigation into this case (Figure 2) reveals an interesting aspect of this divergence. Despite the intention
to mirror the price the broker pays to purchase shares, a decision to prolong the execution phase results in a notice-
able premium over the intended buyback benchmark. This substantial premium highlights the financial inefficiencies
inherent in the existing execution approach.
Case Study 2:
Our second case study (Figure 3) offers another perspective on the problem. We observe an initial slow phase, post
which 90% of the buyback volume is executed rapidly within 110 days, accounting for merely 40% of the allowable
execution period.
These real-world cases offer stark evidence of deviations from conventional execution profiles. Importantly, these are
not academic or theoretical peculiarities, but materially significant phenomena with financial implications. Corpora-
tions may be exposed to undue financial risk owing to premature termination or unnecessarily protracted execution
of the buyback phase. Such deviations from optimal execution schedules may compromise the strategic objectives of
share buybacks, such as boosting Earnings Per Share (EPS) or effectively returning capital to shareholders.
These case studies highlight the exigency of the ’Trading Schedule Paradox’ and underscore the need for a more robust
understanding of its implications. The ensuing sections of this paper strive to further unravel this anomaly, with a view
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Figure 2: Accelerated buying at lower prices and early cessation: Case Study 1
Figure 3: Executing the buyback in 40% of the allowable time: Case Study 2
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to propose a refined execution strategy for share buybacks, effectively mitigating the risks and inefficiencies revealed
herein.
4 The Benchmark Paradox
In this section, we delve into an intriguing yet problematic phenomenon known as the ’Benchmark Paradox’ that arises
in the context of share buybacks. This paradox originates from the typical choice of benchmark used in these finan-
cial operations—namely, the simple average of daily Volume Weighted Average Prices (VWAPs). While seemingly
innocuous, this benchmark choice can foster unexpected and counterproductive behavior among brokers executing the
buybacks, leading to suboptimal outcomes for the corporations involved.
We initiate our exploration by offering an in-depth explanation of the Benchmark Paradox and elucidating its implica-
tions on share buybacks. This paradox plays a substantial role in defining the dynamics of these buyback operations,
influencing factors such as trading conduct, cost considerations, shareholder value, and the alignment of interests. Fur-
thermore, we highlight the wider implications of this paradox on corporate financial strategies, thereby emphasizing
the need for a comprehensive understanding and possible mitigation strategies.
In the following sections, we dissect the Benchmark Paradox in great detail, discussing its effects on share buybacks,
its broader consequences and implications, and potential solutions to mitigate its impact. Through this examination,
we aim to provide valuable insights that could inform more effective strategies for executing share buybacks and
managing corporate finances.
4.1 Understanding the Benchmark Paradox: Explanation and Impact
The ’Benchmark Paradox’ denotes a critical inconsistency we discerned in the operation of share buybacks, partic-
ularly in the selection and usage of benchmarks for these financial strategies. This paradox underscores a potential
discrepancy between anticipated and actual outcomes, shaped by the specific choice of benchmark. A profound un-
derstanding of this paradox is imperative for structuring and evaluating the performance of buyback initiatives, given
the central role that benchmarks assume in these financial operations.
Share buyback programs typically employ the simple average of daily Volume Weighted Average Prices (VWAPs) as
their benchmark. The VWAP is a globally recognized measure of the average price a security has traded at throughout
the day, factoring in volume. Its widespread acceptance hinges on its perceived ability to offer an accurate reflection
of the prevailing market price of a security on a given day.
Nonetheless, when implementing buybacks over a multi-day horizon, the utilization of a simple average of daily
VWAPs as a benchmark leads to the Benchmark Paradox. A simple average, inherently, fails to account for volume
fluctuations throughout the buyback execution period. This oversight can incite brokers to adjust their trading volumes
to capitalize on this attribute of the simple average.
Specifically, given a volume-insensitive benchmark, brokers may be incentivized to trade aggressively during periods
of lower prices to purchase a larger portion of the repurchasing volume. Conversely, they might reduce their trading
activities when prices are relatively high. This behavior, while fully consistent with the given benchmark, could
inadvertently inflate market impact and escalate trading costs, thereby undermining the efficiency of the buyback
initiative.
In essence, the ’Benchmark Paradox’ raises a significant issue in the design and implementation of share buybacks: a
benchmark conceived to steer value-maximizing trading can inadvertently yield a trading strategy potentially subopti-
mal for the corporation conducting the buyback.
In the subsequent sections, we further explore the effects and implications of this paradox on share buyback strategies
and corporate finance in a broader context.
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4.2 Effects of the Benchmark Paradox on Share Buybacks
The Benchmark Paradox introduces meaningful complications to the dynamics of share buybacks, manifesting across
multiple dimensions of these corporate strategies.
A salient effect of the Benchmark Paradox lies in its propensity to shape the trading conduct of intermediaries involved
in share repurchases. The simple average of daily VWAPs as a benchmark, as observed in standard buyback offerings,
can incentivize these intermediaries to manipulate their trading volumes in response to intraday price movements.
This often translates to a trading strategy where more shares are acquired during periods of depressed prices, and
fewer when prices are elevated.
Although such a strategy might prima facie appear cost-effective, it fails to account for the potential market repercus-
sions of these trading decisions. Intensified trading activity during low-price intervals could create unintended market
disturbances, propelling prices upwards and thereby negating the purported benefit of procuring more shares when
prices are low. Conversely, diminished activity during high-price periods might lead to missed opportunities when
prices revert downwards.
Furthermore, this paradox could contribute to a gradual erosion of shareholder value. The manipulation of trading
volumes in response to price variations can introduce heightened market impact and elevated trading costs. This
situation could jeopardize the cost efficiency of buyback initiatives, thereby undercutting their capacity to augment
earnings per share (EPS) or return surplus capital to shareholders.
Additionally, the Benchmark Paradox risks cultivating an insidious misalignment between corporate objectives and
the incentives driving the intermediaries executing the buyback. By adhering to a benchmark that permits such trad-
ing conduct, corporations could inadvertently foster a disconnect between their strategic aspirations and the actual
execution of these aspirations.
To summarize, the Benchmark Paradox, through its influence over trading conduct, cost considerations, shareholder
value, and alignment of interests, can impose significant obstacles to the successful execution of share buyback pro-
grams. The implications of this paradox extend beyond the confines of these buyback programs, with potential rami-
fications for broader corporate financial strategies, as discussed in the subsequent section.
4.3 Consequences and Implications of the Benchmark Paradox
The Benchmark Paradox and its effects on corporate share buybacks have multifaceted consequences, extending from
the specific execution phase to broader strategic considerations in financial management.
At the level of execution, the paradox can distort the cost-efficiency of buyback programs. The simple average of daily
VWAPs, which is commonly used as a benchmark, leads intermediaries to strategically alter their trading volumes in
response to intraday price variations. This manipulation of trading volumes can induce additional transaction costs
and market impact, thereby undermining the effectiveness of the buyback operation in achieving its intended purposes,
such as EPS enhancement or capital return.
On a strategic level, the Benchmark Paradox could cause corporations to reconsider their approach to share buybacks.
Given the potential for execution inefficiencies and market impact, firms may weigh the benefits of buybacks against
these potential downsides, influencing their capital allocation decisions. Consequently, firms may gravitate towards
other methods of capital return or investment, such as dividends or reinvestment in business operations, over share
buybacks.
Importantly, the paradox brings into sharp relief the potential divergence in interests between corporations and their
brokers. This divergence can generate market inefficiencies, as brokers may be led to optimize their execution strate-
gies around the benchmark rather than aligning with the firm’s strategic objectives.
The paradox also raises essential questions regarding regulatory oversight and corporate governance. The poten-
tial adverse effects of the Benchmark Paradox might necessitate regulatory reassessment of the appropriateness of
commonly-used benchmarks in guiding buyback operations. Similarly, corporations should scrutinize their reliance
on these benchmarks, and explore more effective ways to align brokers’ incentives with their strategic objectives.
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In summary, the Benchmark Paradox carries significant implications for the execution and strategy of share buybacks.
Its impacts span micro-level transactional details to macro-level financial management decisions, underscoring the
need for further research and improved understanding of this critical issue.
5 The Psychological Misconception
The ’Psychological Misconception’ underscores a cognitive distortion that pervades the sphere of share buybacks,
clouding the perception of these financial operations and their actual outcomes. This misconception is rooted in the
broker’s assurances to corporations of surpassing a defined buyback benchmark and sharing the ensuing ’profits’.
Consequently, it paints a picture of profitability that belies the reality that corporations may end up paying a premium
over the fair market price.
This segment explores the multifaceted dimensions of this psychological misconception, examining its manifestation,
effects on corporate decision-making, and broader implications. It underscores how cognitive biases, such as over-
confidence and anchoring, can sway strategic corporate financial decisions and give rise to potentially suboptimal
outcomes. This exploration calls into question conventional wisdom in financial decision-making, spotlighting the
importance of behavioral considerations.
Drawing upon insights from behavioral finance, we delve into how psychological misconceptions can distort corpora-
tions’ strategies and targets for buyback operations, potentially undermining their strategic objectives and impacting
shareholder value. This segment calls for enhanced transparency, comprehensive education, and the potential for
structural reforms in the buyback process as possible remedies. The ’Psychological Misconception’ provides an indis-
pensable perspective on understanding share buybacks, paving the way for a more nuanced comprehension of these
financial operations.
5.1 The Psychological Misconception: Explanation and Influence
Unraveling the psychological factors within the scope of corporate share buybacks provides crucial insights into the
decision-making processes that guide these transactions. One such influence lies in the psychological misconception
that corporations can profit from the buyback operations through intricate arrangements with their brokers.
This misconception, steeped in psychological constructs, is largely induced by the brokers’ offerings. Corporations
are promised the opportunity to beat a specified buyback benchmark, usually calculated as a simple average of daily
VWAPs, with an added appeal of sharing in the subsequent ’profits’. This portrayal can breed an illusion of profitabil-
ity, fostering the belief that the buyback operation is not merely a corporate strategy, but a profit-making venture in
itself.
However, an incisive examination reveals a different picture. Corporations are essentially paying a higher price for
their shares compared to the actual market price at which brokers acquire these shares. While the broker might surpass
the benchmark and distribute part of the perceived ’profits’, the corporation is, in reality, paying a premium over the fair
market price. This fallacy draws attention to the role of cognitive biases in corporate financial decision-making, where
the attractive frame of profit-sharing and beating the benchmark can lead to a misjudged perception of profitability.
Cognitive biases, such as anchoring, play a pivotal role here. With the promises of beating the benchmark and sharing
’profits’, corporations may overlook the fact that the benchmark itself might contain a premium over the fair market
price. This psychological anchoring, combined with a skewed framing of the buyback operation, can profoundly
impact corporate perceptions and decisions regarding share buybacks. Thus, the psychology of financial decision-
making emerges as a crucial yet underexplored dimension in the sphere of share buybacks.
5.2 The Nexus of Psychological Factors in Share Buyback Decisions
The integral role of psychology in financial markets has been an area of research that has garnered significant attention
over the years. This field of study, often dubbed as "behavioral finance," has questioned and enriched our under-
standing of traditional financial theories, exploring the subtleties of human cognition and how they shape the financial
landscape. The psychological misconception associated with share buybacks aptly demonstrates this amalgamation
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of finance and psychology, further inviting scrutiny into conventional financial wisdom and advocating for a more
nuanced comprehension of the human elements influencing corporate financial decisions.
Traditional finance often postulates the notion of homo economicus, or the rational economic man, who is assumed
to make decisions solely based on a clear, calculated approach aimed at optimizing financial outcomes. However,
the reality, as exposed by the psychological misconception in the context of share buybacks, tends to challenge these
assumptions. The study reveals that even a strategic corporate financial decision, such as share buybacks, can be
susceptible to cognitive biases. It emphasizes how the belief in deriving profits from buybacks persists, even when
empirical evidence indicates a likelihood of paying a premium over the fair market price, and underscores the potential
distortive effects of cognitive biases on financial decision-making.
Several cognitive biases, including overconfidence, anchoring, and confirmation bias, can significantly influence the
execution strategy of share buybacks. Overconfidence, for instance, may instigate executives to overestimate the value
they can create through share buybacks, and thus potentially lead to an inefficient capital allocation. This bias can be
further compounded when supported by a narrative focusing on benchmark outperformance, potentially obscuring the
larger financial implications of such decisions.
Anchoring, defined as the human propensity to rely heavily on the initial piece of information (the anchor) when
making decisions, can significantly impact the buyback decision-making process. For instance, the initially proposed
benchmark might serve as an anchor that subsequently influences all future decisions, despite changes in market
conditions that might warrant a revision in strategy.
Another crucial cognitive bias is confirmation bias, which involves the tendency to favor and seek out information
that confirms one’s preexisting beliefs. This bias can contribute to a selective interpretation of the buyback execution
success, with a focus on benchmark outperformance, whilst neglecting the implications of paying a premium over the
fair market price.
The ramifications of these cognitive biases extend beyond the immediate financial metrics, often distorting corporate
strategy, potentially leading to suboptimal capital allocation, and engendering unintended consequences for share-
holder value. Recognizing these biases and their pervasive influence on decision-making processes is pivotal to ensure
efficient corporate governance and effective financial decision-making.
Potential mitigation strategies could include promoting rigorous analysis, transparent reporting, and robust corporate
governance mechanisms. In addition, fostering an environment that encourages continuous learning and promotes
understanding of these biases could also be instrumental in mitigating their effects. These measures collectively
emphasize the need to integrate psychological considerations into financial theory and practice, underscoring the
significant influence of the psychological misconception in share buybacks.
By shedding light on the intersection of finance and psychology, the psychological misconception in share buybacks
adds an invaluable layer of complexity to our understanding of financial markets. It underscores the importance
of considering the human element in financial decisions and propounds a comprehensive approach that integrates
financial theory with behavioral insights.
5.3 The Psychological Misconception’s Impact on Share Buybacks
The psychological misconception, as it has been presented, can significantly influence the execution and outcomes of
share buybacks. The illusory promise of profitability, embedded within the presentation of broker arrangements, often
overshadows the reality of a potential premium over the fair market price.
This misconception can skew corporations’ strategies and targets for the buyback operation. With an illusory objective
of making ’profits’ from the transaction, corporations may not adequately focus on the actual strategic objectives of
the buyback, such as increasing earnings per share or improving capital structure.
Furthermore, this misconception can also impact how corporations assess the success or effectiveness of their buyback
operations. By tying success to the ability of the broker to outperform a specified benchmark, corporations may not
fully account for the added cost of purchasing shares at a premium. Consequently, corporations may interpret and
report buybacks as more successful than they actually are in terms of shareholder value creation.
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Ultimately, the psychological misconception introduces a layer of complexity and potential distortion to corporate
decision-making and evaluation in share buybacks. By framing the buyback as a profit-making operation and focusing
on beating the benchmark, corporations may lose sight of the broader strategic goals of the buyback and potentially
undermine its effectiveness. This misconception, therefore, warrants further examination and understanding within
the literature on share buybacks.
5.4 Discussion on Implications and Potential Remedies
The psychological misconception in share buybacks bears substantial implications for both corporations and their
shareholders. By distorting the view of corporations and pushing them toward the illusory objective of profit-making,
it compromises the strategic purpose of share buybacks, which ultimately aim to create shareholder value.
Corporations may end up spending more to repurchase shares, often at a premium, which can drain financial resources
that might otherwise be used more efficiently. These actions can inadvertently dilute shareholder value rather than
enhancing it.
As for potential remedies to this issue, it is critical to foster a more accurate understanding of the buyback process
and its impacts among decision-makers in corporations. This can be achieved through comprehensive education about
share buybacks, emphasizing the potential misalignments introduced by benchmarking strategies and the misconcep-
tions surrounding profitability.
Additionally, enhancing transparency about the costs and impacts of share buybacks could play a key role in addressing
the psychological misconception. Corporations should be encouraged to conduct thorough cost-benefit analyses before
executing a share buyback, incorporating all potential premiums over the fair market price and the subsequent impacts
on shareholder value.
Lastly, reforms could be explored in the structuring of buyback agreements to ensure they better align with the strategic
objectives of corporations. This could involve rethinking the use of benchmarks or renegotiating the terms of profit-
sharing arrangements.
Overall, addressing the psychological misconception will require a concerted effort on the part of academia, corpo-
rations, and regulatory bodies. It presents an important avenue for further research and policy debate in the field of
corporate finance.
6 Optimizing Share Buyback Execution Using Genetic Algorithms
In the domain of corporate finance, the optimization of share buyback execution remains a complex task. Devising an
optimal trading schedule, determining the optimal number of shares to be bought back each day, and staying within
the confines of regulatory and risk constraints requires a multidimensional approach to problem-solving.
Genetic Algorithms (GAs), computational models inspired by natural selection and evolution, are renowned for their
effectiveness in navigating complex solution spaces. GAs operate on the principles of selection, crossover, and muta-
tion, and their capacity to efficiently manage high dimensionality and non-linearity renders them fitting tools for the
task at hand.
This section delves into the intricate world of GAs and their relevance to share buybacks. We aim to dissect the
buyback optimization problem in detail, identifying the numerous constraints and variables involved. By merging the
computational prowess of GAs with the multidimensional challenges of share buyback execution, we hope to illustrate
how these algorithms can provide corporations with a potent tool to maximize their financial outcomes.
6.1 Introduction to Genetic Algorithms and Their Relevance to Share Buybacks
Genetic algorithms (GAs) are heuristic search techniques inspired by the principles of natural selection and genetics.
As one of the most renowned techniques in the evolutionary algorithms family, they have been broadly utilized in
several disciplines to tackle various types of optimization and search problems.
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GAs operate by generating a population of possible solutions and iteratively updating this population through processes
analogous to natural selection and evolution: selection, crossover (or recombination), and mutation. At each iteration,
solutions (individuals) are selected according to their fitness in solving the problem. Then, pairs of solutions are
combined through crossover to create new solutions (offspring). Lastly, random mutations are introduced to maintain
diversity in the population and avoid premature convergence.
With their ability to explore a large solution space effectively and efficiently, GAs become an attractive option when the
problem at hand has a complex search space with multiple optima. This ability to manage complexity, combined with
their adaptability to various problem domains, makes GAs a valuable tool for optimizing share buyback execution.
In share buyback execution, corporations often confront the challenge of deciding the optimal trading schedule – that
is, when and how much to buy on each trading day. The optimal schedule would be one that enables the broker to
outperform the buyback benchmark while minimizing the actual market price paid by the broker. However, devising
this optimal schedule is a formidable task, given the complexities and uncertainties associated with financial markets.
These complexities involve dynamic price movements, trading constraints, market impact costs, and more. Further-
more, the evaluation of a particular schedule requires an understanding of how it would have performed in the past
under various market conditions - a task that traditional analytical methods may struggle to handle due to the high
dimensionality and non-linearity of the problem.
This is where GAs come into the picture. Their ability to navigate vast, complex solution spaces makes them a fitting
candidate for the task. Moreover, GAs can iteratively ’learn’ from the past performance of various trading schedules
and adapt to the evolving nature of the problem. Hence, they hold considerable promise for aiding corporations in
devising optimal share buyback strategies.
In the following sections, we will delve deeper into the specifics of the buyback optimization problem and elaborate
on how GAs can be designed and implemented to tackle this problem effectively.
6.2 The Buyback Optimization Problem: A Closer Look
In the realm of share buybacks, the process of deciding an optimal trading schedule is paramount to achieving desired
financial outcomes. The schedule must detail when and how much of the company’s shares are to be bought back on
each trading day. This decision-making process is thus a multidimensional optimization problem where the objective
function and the constraints are governed by the interplay of several financial variables and strategic considerations.
The primary goal is to optimize the broker’s profit, achieved through the outperformance of the buyback benchmark
relative to the actual price paid in the market. Here, the buyback benchmark typically represents an average price
metric, such as the simple average of daily Volume Weighted Average Prices (VWAPs), over the period of the buyback
program.
In a perfect market scenario, the price the broker pays to acquire shares in the market (market price) and the buyback
benchmark should be equivalent. However, due to various market dynamics, a gap often exists between these two
prices, with the buyback benchmark usually set higher than the market price. This gap, referred to as the "premium,"
is the primary source of the broker’s profit. Maximizing this premium while staying within the regulatory and risk
constraints is the essence of the buyback optimization problem.
However, formulating and solving this optimization problem is far from trivial. The multidimensionality of the prob-
lem arises from the large number of trading days, each representing a decision variable whose value (amount of shares
to buy back) needs to be determined. The objective function, representing the premium, is a complex function of these
decision variables, the historical and projected market prices, and the buyback benchmark.
Moreover, the problem is subject to a multitude of constraints. There is a regulatory upper limit on the daily volume
of shares that can be bought back. The company may also set a maximum allowable deviation from the buyback
benchmark to manage risk. Furthermore, the total volume of shares to be bought back during the program needs to be
predetermined.
Given these intricacies, traditional analytical methods often fall short in providing an efficient solution. The non-
linearity and high dimensionality of the problem necessitate a more sophisticated approach, which leads us to explore
the application of Genetic Algorithms (GAs) to this optimization problem. As discussed in the previous section, GAs,
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with their ability to explore complex solution spaces, hold significant promise for delivering an efficient and effective
solution to this intricate optimization problem.
6.3 Designing the Genetic Algorithm: Selection, Crossover, and Mutation
6.3.1 Initial Population Generation and the Notion of ’Fitness’
To tackle the complex problem of optimizing share buybacks, we turn to the principles of natural selection and evolu-
tion, encapsulated in the form of genetic algorithms (GAs). The first step in our algorithmic design involves generating
an initial population of trading schedules, referred to as ’individuals’ in GA terminology.
Each individual is a unique vector, the elements of which denote the fraction of total shares to be traded each day
across a predetermined 100-day trading horizon. The total volume across all days is normalized to ensure it equals the
total number of shares to be repurchased. Notably, the volume for a single trading day is randomly chosen, constrained
to fall within a specific predefined range. This restriction reflects the real-world limit to how many shares can be traded
in a day without causing significant price disruptions.
As the process evolves, the notion of ’fitness’ comes to the fore. Fitness is a measure of how well an individual
solves the problem at hand - in our case, the maximization of the broker’s profit, achieved by exceeding the buyback
benchmark relative to the actual price paid in the market. Each individual’s fitness is evaluated using a function that
calculates the broker’s profit for a given trading schedule.
6.3.2 Selection and the Survival of the Fittest
Once the initial population’s fitness has been evaluated, the selection process is initiated. The selection function
chooses parents for reproduction, based on their fitness scores. We utilize a tournament selection mechanism, wherein
a subset of the population is selected at random, and the individual with the highest fitness within this subset is chosen
as a parent. This process is repeated to select multiple parents, paving the way for genetic diversity in the offspring
generation.
6.3.3 Crossover: Combining the Best of Both Worlds
Next, we perform the crossover operation, a method that simulates biological reproduction and genetic crossover.
We implement a two-point crossover function, which selects two points on the parent chromosomes. Everything
between these two points is then interchanged between the parents, producing two offspring. This operation provides
the offspring with a mix of trading strategies from both parents, creating diversity and offering potentially improved
solutions.
6.3.4 Mutation: Introducing Random Variations
To further diversify the solution pool and prevent the GA from prematurely converging on local optima, we incorporate
mutation operations. These operations modify individual chromosome elements (daily trading volumes) according to
a small probability. In our GA, we deploy a bounded polynomial mutation. This type of mutation perturbs the trading
volume for a particular day within a specific range, ensuring that the search space is sufficiently explored, and new
solutions can emerge.
6.3.5 Iterative Evolution Towards an Optimal Solution
Following the operations of selection, crossover, and mutation, a new generation of individuals is formed. These
individuals are evaluated for fitness, and the process is repeated over numerous generations. The iterative process of
selection, crossover, mutation, and survival of the fittest over many generations helps the population evolve towards
an optimal trading schedule.
At the end of the GA’s execution, the fittest individual, representing the optimal trading schedule, is selected. This
schedule signifies the volumes to be traded each day of the fixed horizon to maximize the broker’s profit, all while
adhering to the constraints of trading volumes.
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By structuring the share buyback optimization problem in this way, we harness the power of GAs to find near-optimal
solutions. The inherent flexibility of GAs also allows us to factor in various constraints and nuances of the share
buyback process, making this method well-equipped to handle the complexities and challenges of optimizing share
buyback execution.
6.4 Applying the Genetic Algorithm to Share Buyback Optimization
This section moves our discussion from the theoretical construct of genetic algorithms (GA) to the practical realm
of share buyback optimization. By deploying the GA, we engage in a significant step forward within the context of
financial decision-making, offering an innovative blend of computational intelligence and market expertise.
The initiation of the algorithm begins with inputting historical stock price data from a 100-day span into the GA. This
time horizon reflects a typical period for share buyback operations. Each individual within the GA’s initial population
represents a unique trading schedule that outlines the volume of shares to be repurchased each day. This construct
enables the GA to explore a diverse solution space in search of trading schedules that maximize broker profit margins
while respecting maximum daily and total volume constraints.
At each stage, the GA undertakes iterative cycles of selection, crossover, and mutation, thus exploring a new generation
of potential solutions (i.e., trading schedules). This iterative process ensures that the GA avoids premature convergence
on local optima, instead fostering a continuous pursuit for the most advantageous solution.
As the algorithm evolves, the fittest individual (optimal trading schedule) from the final generation emerges. This
trading schedule delineates the daily share repurchase volumes that maximize the broker’s profitability.
Our initial empirical evaluations reveal a significant outperformance of the conventional buyback benchmark. This
evidence speaks to the GA’s ability to identify and pursue high-performance solutions. The algorithm demonstrates
both robustness in varying market conditions and the ability to effectively adjust the trading strategy accordingly. The
GA’s inherent flexibility also ensures that it can accommodate shifts in stock liquidity and market volatility, thereby
highlighting its suitability for real-world market operations.
This innovative deployment of the GA in share buyback optimization has profound implications. Not only does it
bring rigorous, data-driven computational algorithms into financial decision-making, but it also provides a robust tool
for maximizing profits from share repurchases. As such, this method may offer a new way forward in the sphere of
corporate share buybacks.
6.5 Evaluating the Performance of the Genetic Algorithm
A salient question within the share buyback execution landscape is: how does our genetic algorithm (GA) fare in com-
parison to traditional methods? This section intends to explore this inquiry in depth, examining the GA’s performance
and elucidating the findings of our research.
Traditionally, share buyback execution has relied on static trading schedules or rudimentary heuristics. However, our
GA adopts a dynamic and flexible approach, actively tailoring trading schedules to optimize broker profits. Therefore,
our performance evaluation methodology must duly reflect this dynamism and the unique complexities associated with
the share buyback environment.
The performance of our GA is initially assessed by comparing the prices paid by corporate clients using GA-optimized
trading schedules with those obtained via the conventional buyback benchmark. Our analysis consistently revealed a
superior performance by the GA, thereby highlighting its capability to deliver robust outcomes across diverse market
conditions and various time horizons.
For a more comprehensive evaluation of the GA’s efficacy, we undertook a series of simulations under an array of
market scenarios, using a geometric Brownian motion (GBM) model. By modifying parameters related to drift and
volatility, we synthesized a spectrum of possible market conditions. The GA demonstrated admirable adaptability,
consistently optimizing schedules across different market scenarios, thereby emphasizing its versatility.
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Most noteworthy is that we could nearly replicate the empirical findings from actual share buybacks within our GBM
simulation. This underscores the GA’s ability to accurately capture the complex dynamics of real-world share buyback
processes and reinforces its potential as a powerful tool for optimizing share buyback executions.
Furthermore, we probe the optimal trading schedules under various market conditions. We focus on three representa-
tive scenarios, characterized by different stock price drift trends: negative, zero, and positive.
Figure 4: Optimal trading schedule under negative stock price drift.
Figure 4 exhibits the optimal trading schedule in a scenario with negative stock price drift.
Figure 5 depicts the optimal trading schedule when the stock price drift is zero.
Finally, Figure 6 illustrates the optimal trading schedule when faced with a positive stock price drift.
These scenarios emphasize the need for adaptive and dynamic trading strategies that account for current and projected
market conditions. s One key finding across these scenarios is the progressive widening of the gap between the buy-
back benchmark and the volume-weighted average price (VWAP) over time, despite them starting at the same value.
This divergence is observed regardless of the direction of the stock price drift.
This finding underlines the importance of a responsive and flexible trading strategy, one that considers not just the
prevailing stock price but its anticipated trajectory. A strategy designed with this foresight can better align with the
buy-back benchmark, potentially improving the performance of the buy-back strategy.
While our initial results are encouraging, the application of the GA in the share buyback context remains a dynamic
field, with scope for further exploration and refinement. Potential improvements could include the tuning of GA
parameters, incorporating more sophisticated evaluation functions, and utilizing the GBM model’s flexibility to adjust
drift and volatility parameters more precisely.
In summary, our study underscores the GA’s effectiveness in identifying optimal trading schedules. Starting from a
baseline of equal volumes and introducing iterative modifications, we find schedules that account for the dynamic
nature of stock prices and the gradually widening gap between the buy-back benchmark and the VWAP. Remarkably,
these schedules bear a striking resemblance to empirically observed patterns in share buybacks. This ability to mirror
real-world scenarios underlines the value of our innovative GA-based approach, which could open up exciting new
directions in financial decision-making.
28

Figure 5: Optimal trading schedule under zero stock price drift.
6.6 Implications and Future Directions
The application of genetic algorithms for optimizing share buyback execution has profound theoretical and practical
implications, and opens up new avenues for future research.
From a theoretical perspective, this study contributes to the expanding literature on the application of computational
techniques in finance. It validates the viability of genetic algorithms in solving complex optimization problems in
financial contexts, thus enriching the discourse in the intersecting fields of finance and computational technology.
Practically, this study offers a computational strategy for corporations and brokers to optimize the execution of share
buybacks. By significantly outperforming the traditional buyback benchmark, our approach can enhance value for
shareholders and provide competitive advantages to brokers, leading to increased client satisfaction and potentially
larger market shares.
Our work, however, merely represents an early step in the vast landscape of computational finance. The potential
applications of genetic algorithms extend well beyond the scope of our study.
Further research could delve deeper into other forms of trading, such as algorithmic strategies, by adopting the pro-
posed genetic algorithm. Additionally, incorporating real-world constraints and factors, including market liquidity,
regulatory frameworks, and psychological considerations into the algorithm, could be a promising way to enhance the
adaptability and effectiveness of the model.
Another potential direction for future research lies in integrating machine learning techniques with genetic algorithms.
The creation of hybrid models, possibly through the use of reinforcement learning for dynamic adaptation of algorith-
mic parameters or employing deep learning to capture intricate relationships within financial markets, could advance
our understanding and application of computational finance.
In summary, this study illustrates the potential of integrating finance with computational intelligence, fostering a new
line of thought for financial decision-making. The path for computational finance is broad and full of potential, and
we anticipate more exciting developments and contributions in this burgeoning field.
29

Figure 6: Optimal trading schedule under positive stock price drift.
7 Discussion and Analysis
This section delves into the intertwined narrative that emerges from the three anomalies observed in the realm of
share buybacks: the seemingly erratic trading schedules, the consistent outperformance of the buyback benchmark
by brokers, and the puzzling satisfaction derived by corporate entities from the existing profit-sharing model. Even
though these phenomena initially appear disparate and disconnected, a closer examination of their dynamics reveals a
deeply interlinked and coherent storyline.
While our in-depth analysis provides a plausible explanation for each of these anomalies, the broader implications of
these findings, their impact on our understanding of financial markets, and potential directions for future research are
equally important to consider. We explore these aspects in the subsequent subsections, aiming to shed light on the
myriad of theoretical, practical, and future-facing implications of our study.
7.1 A Comprehensive Overview: Interlinking the Anomalies
The world of share buybacks, a common yet highly intricate strategy for capital allocation, is ripe with peculiar
phenomena that resist traditional explanations. Three such anomalies have become the focal point of our investigation:
the seemingly erratic trading schedules, the unassailable advantage brokers possess in outperforming the buyback
benchmark, and the perplexing satisfaction corporate entities derive from the existing profit-sharing model. When
examined individually, these anomalies appear disparate, each isolated within its own unique context. However, our
research suggests an interlinked narrative, one where each anomaly contributes to a coherent storyline elucidating the
enigmatic nature of share buybacks.
Our journey begins with the trading schedule anomaly, a phenomenon characterized by daily trading volumes that
seem to buck the trends expected under normal market conditions. This enigma initially appears unfathomable, with
traditional financial theories offering little insight into the observed variations. However, a breakthrough emerged
when we considered the role of mathematical optimization in trading. Deploying a genetic algorithm in a series of
simulations, we were able to generate trading schedules that closely mirrored empirical volumes observed in actual
buyback operations. This intriguing result, though not definitive evidence, suggests that brokers may be utilizing
complex optimization techniques to strategize their trading schedules. It’s important to note that our genetic algorithm
merely approximates the empirical patterns; we can’t assert that brokers are specifically using genetic algorithms
30

or a similar optimization technique. Nevertheless, our findings point towards a plausible solution to this previously
inexplicable anomaly.
The buyback benchmark anomaly presents another conundrum. Conventional wisdom suggests that consistently out-
performing the benchmark should be a herculean task in an efficient market. Yet, brokers engaged in share buybacks
regularly accomplish this feat, arousing suspicions about potential market inefficiencies or asymmetrical information.
However, our examination of the trading schedule anomaly provided a fresh perspective. Rather than viewing this con-
sistent outperformance as a breach of market efficiency, we proposed that it could be the result of brokers exploiting
the insights gleaned from their sophisticated optimization processes. Our findings confirmed that outperforming the
buyback benchmark is relatively straightforward when equipped with a suitably optimized algorithm. This revelation
frames the brokers’ consistent outperformance not as an aberration of market principles, but as a strategic maneuver
exploiting the inherent features of the buyback benchmark.
Lastly, we scrutinized the anomaly associated with corporate psychology, specifically regarding corporations’ percep-
tion of profit-sharing in share buyback operations. The corporate entities’ consistent satisfaction with profit-sharing
arrangements seems paradoxical when one considers that the corporations typically pay more than the fair market
price for repurchased shares. Yet, our investigation of the preceding anomalies provided a surprising revelation. Cor-
porations derive satisfaction from the shared profits that come with beating the buyback benchmark. The sense of
contentment could be attributed more to the psychological reward of outperforming the benchmark, rather than an
informed assessment of the actual costs and benefits. Thus, the psychological gratification from outperforming an
easily surmountable benchmark might blind corporations to the inflated prices they often pay for repurchased shares.
Collectively, these interlinked anomalies unravel a fascinating narrative within the complex world of share buybacks.
Their interconnections highlight the multilayered nature of financial markets, marked by a seamless blend of mathe-
matical optimization, strategic decision-making, and psychological factors. This comprehensive analysis, therefore,
underscores the need for a multifaceted approach to financial markets, one that combines rigorous mathematical tech-
niques, strategic considerations, and a nuanced understanding of corporate psychology. This rich tapestry of insights
underscores the profound complexity that lies at the heart of financial market operations, illuminating the intriguing
reality of share buybacks.
7.2 Theoretical and Practical Implications of the Identified Anomalies
This comprehensive study provides compelling insights into three distinct anomalies within the realm of share buy-
backs. We have found intriguing facets in the execution of buybacks that can significantly impact both theoretical
financial frameworks and practical applications within the industry.
From a theoretical standpoint, the application of genetic algorithms to unravel the mystery of trading schedules
presents a compelling narrative. The role of optimization techniques is well-established in several financial opera-
tions, with key areas such as portfolio optimization and algorithmic trading harnessing their potential. However, share
buybacks have largely been overlooked in this context. Through our investigations, we reveal a mathematical model
that mimics the observed empirical trading volumes remarkably well, thereby broadening our comprehension of the
dynamics at play during buybacks. We also put forth the idea that brokers could be leveraging such sophisticated
algorithms in their operations.
The insights we unearthed about the buyback benchmark anomaly prompt a re-evaluation of the Efficient Market
Hypothesis (EMH). On first glance, one might perceive the consistent outperformance of the buyback benchmark as a
violation of EMH. Upon closer inspection, though, we find this outperformance can be tied not to market inefficiencies,
but to astute exploitation of the benchmark’s structural features. This understanding presents an intriguing twist to the
classic EMH perspective.
The psychology anomaly unravels fascinating aspects of perception. We often tie satisfaction from buybacks to tangi-
ble economic gains. However, our study suggests cognitive biases might be more influential. This proposition could
serve as a critical point of departure for merging cognitive psychology into traditional financial theory, contributing
significantly to the burgeoning field of behavioral finance.
On the practical side, our findings present a myriad of strategic possibilities for both corporations and brokers. Under-
standing that the buyback benchmark can be outperformed systematically, corporations could use this knowledge to
negotiate better terms with brokers, or even participate in profit-sharing schemes. Moreover, brokers could utilize the
insights to improve their proprietary trading algorithms and maintain their competitive advantage.
31

Furthermore, the successful implementation of genetic algorithms could act as a catalyst for corporations to invest in
advanced technology like artificial intelligence and machine learning, thereby enhancing their financial strategy.
In conclusion, our rigorous exploration of the three share buyback anomalies provides a wealth of insights. These
findings have significant potential to impact the understanding of share buybacks, inform future academic research,
and revolutionize industry practices. The breadth and depth of our study serve to underscore its significance, and its
potential to be a catalyst for change in both academic and industry realms of finance.
7.3 Future Directions for Anomaly Research in Share Buybacks
The exploration and understanding of anomalies within share buybacks provide an abundant field for further investi-
gation. As our work has indicated, there is a depth of complexity to this area, with the promise of many rich insights
to be uncovered with rigorous and innovative research approaches.
The influence of advanced algorithms in the construction of trading schedules, as evidenced by our utilization of a
genetic algorithm, forms an exciting prospect for ongoing research. Consideration of additional optimization methods
or alternative machine learning algorithms could reveal fresh perspectives and enhance the models currently in use.
It remains to be seen whether there are alternative algorithms that could outperform or elucidate different facets of
broker behavior in the context of share buybacks.
The intersection between behavioral finance and share buybacks, particularly in light of the psychological satisfaction
derived from a profit share in benchmark outperformance, offers a compelling area for exploration. This opens the door
to research focused on understanding the cognitive biases at play during share buyback transactions. The development
of a more sophisticated comprehension of these psychological elements could contribute significantly to our grasp of
financial market dynamics.
There is also merit in examining the potential ramifications of shifts in the regulatory landscape on the anomalies
we have identified. Future studies might ask: how would modifications to corporate governance rules or securities
legislation influence the nature and prevalence of these anomalies? Could certain regulatory conditions exacerbate or
mitigate these anomalies?
Further, it would be worthwhile to investigate the behavior of these anomalies under diverse market conditions. While
our work employed geometric Brownian motion, the application of other stochastic models - such as those incor-
porating elements of market volatility or jump diffusion - could be used in future explorations. Specifically, could
an integration of elements of market microstructure or high-frequency trading data offer more precise models and
predictions?
There is also significant scope to explore these anomalies in different geographical markets. A comparative analy-
sis could help determine if the anomalies we have identified are universally applicable, or whether they are shaped
by regional market characteristics. Moreover, can regional considerations have a direct impact on the anomalies’
manifestation and overall effect?
Finally, additional research could look at the long-term implications of these anomalies on firm valuation and share-
holder wealth. While our study concentrated on the immediate ramifications of these anomalies, understanding their
extended impact is of paramount importance.
In conclusion, our work opens up a multitude of potential avenues for future research. Each of these directions
promises further insights that can deepen our understanding of share buybacks and the complex variables that govern
their execution. We sincerely hope that our work serves as a springboard for further research, ultimately leading to a
more profound understanding of this pivotal element of corporate finance.
8 Conclusion
As we conclude our rigorous exploration into share buyback anomalies, this final section synthesizes our key findings,
evaluates their significance, reflects on their contributions to the academic dialogue on share buyback execution, and
anticipates potential future developments in this field. We present a succinct recapitulation of our results and their
32

implications. Our discussion highlights how our research enriches the understanding of share buyback anomalies, and
serves as a foundation for further inquiries in the evolving landscape of financial markets.
8.1 Recap of Key Findings and their Significance
In this research, we embarked on a comprehensive exploration of anomalies surrounding share buybacks, specifically
focusing on the trading schedule anomaly, the buyback benchmark anomaly, and the psychological anomaly. The
investigation was driven by an in-depth analysis of these three anomalies, and the deployment of a genetic algorithm
(GA) to emulate the trading behavior observed in empirical buyback data.
The key finding of our study lies in the successful replication of the trading schedule anomaly through our GA,
suggesting that brokers may use an algorithmic approach to formulate trading schedules. We discovered that the GA-
driven trading schedule indeed outperforms the typical VWAP benchmark, thereby explaining the seemingly irrational
satisfaction corporates display when the benchmark is beaten.
We also found that the buyback benchmark anomaly and the psychological anomaly are inherently linked. The preva-
lent use of an easy-to-beat benchmark, coupled with the profit sharing agreement, often results in satisfaction among
corporates, although the benchmark does not necessarily represent optimal performance.
These findings are significant as they challenge the conventional wisdom about the supposed inefficiencies in share
buybacks. Our study showcases how brokers may leverage algorithmic strategies to optimize trading schedules,
thereby maximizing their profits. The anomalies that appear irrational may, in fact, be the result of strategic behaviors
and mutually beneficial arrangements between corporates and brokers.
8.2 Reflection on the Study’s Contribution to Share Buyback Execution
The insights garnered from our research offer a significant contribution to the understanding of share buyback execu-
tion, demonstrating how anomalies within this sphere may be intertwined and rooted in strategic practices rather than
irrational behaviors or market inefficiencies.
Our application of a genetic algorithm to model trading schedules offers a potential explanation to the erratic trading
schedule anomaly. This scientific approach to trading, suggested by our research, provides valuable insights into
how brokers might strategically manage their trading activities. It moves us away from the conventional view of
irregular trading schedules as a mere result of spontaneous decision-making, and instead positions these schedules as
potentially well-calculated outcomes of algorithmic planning. Consequently, this calls for a reevaluation of traditional
trading theories that don’t account for such sophisticated strategies.
Our study also brings fresh perspectives to the buyback benchmark anomaly. By revealing that a well-optimized
algorithm can consistently outperform the buyback benchmark, we have shifted the narrative from potential market
inefficiencies or asymmetric information, to strategic exploitation of the benchmark’s design. The frequent outper-
formance of the benchmark, rather than an indictment of the Efficient Market Hypothesis, is seen as an outcome of
optimal strategic maneuvers. This provides a more nuanced understanding of how brokers manage to achieve consis-
tent outperformance.
The psychological anomaly, characterized by corporates’ satisfaction with the existing profit-sharing model despite
often paying inflated prices for repurchased shares, is also given a novel explanation. Our research suggests that the
sense of accomplishment that comes with beating the buyback benchmark might overrule an objective evaluation of
costs and benefits. This interplay between cognitive biases and financial decision-making underscores the necessity of
considering psychological factors in understanding the dynamics of share buybacks.
In conclusion, this research provides a substantial contribution to the field of share buyback execution. By deciphering
the underlying reasons for the anomalies prevalent in share buyback, we have provided a fresh interpretation of these
phenomena. We have repositioned them not as irrational or inexplicable occurrences, but as strategic outcomes derived
from algorithmic trading, exploitation of benchmark characteristics, and psychological satisfaction. This offers a more
nuanced and comprehensive view of share buyback execution, serving as a valuable reference for future research and
potential practical applications.
33

8.3 A Look Ahead: Anticipating Future Developments and Directions
As we gaze into the future of share buyback research, a number of potential developments and avenues become
apparent. Our exploration of the world of share buybacks and the anomalies they present has led us to some compelling
insights. Building on these findings, we anticipate several promising directions for future research and practical
applications.
Firstly, our study has underscored the power of computational techniques, such as genetic algorithms, in illuminating
the intricacies of share buyback execution. As we move forward, we anticipate the advent of more advanced and
diverse computational strategies. The rise of machine learning and artificial intelligence presents a plethora of oppor-
tunities for their application in financial markets. We hope future research will continue to leverage these innovative
tools, perhaps even developing novel techniques specifically tailored for the world of finance.
Secondly, the intersection of psychology and financial theory - an intriguing facet of our research - is ripe for further
exploration. As the field of behavioral finance continues to evolve, we foresee an increasing emphasis on understanding
how cognitive biases and emotions affect financial decision-making. This avenue opens the door to more nuanced
investigations into corporate satisfaction with share buyback execution, and the potential influence of various cognitive
biases.
Regulatory shifts also present a significant area for future examination. As the legislative landscape continues to
evolve, it will invariably impact share buyback practices and the anomalies associated with them. It will be cru-
cial to keep a pulse on these changes, assessing their implications for both theoretical understandings and practical
applications of share buybacks.
With the growing interconnectedness of financial markets worldwide, the exploration of share buyback anomalies in
various geographical contexts could yield enlightening findings. Such comparative analyses could reveal how regional
market characteristics shape these anomalies, contributing to a more comprehensive understanding of share buybacks
on a global scale.
Finally, the long-term consequences of share buyback anomalies on firm valuation and shareholder wealth present a
valuable line of investigation. While our current research primarily addresses immediate effects, a deeper dive into
their enduring impact could provide vital insights into the broader implications of these anomalies.
In conclusion, as we project the trajectory of share buyback research, it is evident that we are on the cusp of exciting
developments and revelations. Our work lays the groundwork for these upcoming inquiries, and we look forward to
the continued exploration of share buybacks, as researchers around the globe strive to deepen our understanding of
this vital aspect of financial markets.
34

Acknowledgements
This work has been supported by several institutions, each of which has provided vital resources and expertise to the
research project.
Firstly, we acknowledge the COST Action CA19130 and COST Action CA21163, under the auspices of the European
Cooperation in Science and Technology (COST). COST Actions provide networking opportunities for researchers
across Europe, fostering scientific exchange and innovation. This has been particularly beneficial for this research
project on financial econometrics.
We would like to express our gratitude to the Swiss National Science Foundation for its financial support across
multiple projects. This includes the project on Mathematics and Fintech (IZCNZ0-174853), which focuses on the
digital transformation of the Finance industry. We also appreciate the funding for the project on Anomaly and Fraud
Detection in Blockchain Networks (IZSEZ0-211195), and for the project on Narrative Digital Finance: a tale of
structural breaks, bubbles & market narratives (IZCOZ0-213370).
In addition, our research has benefited from funding from the European Union’s Horizon 2020 research and innovation
program under the grant agreement No 825215 (Topic: ICT-35-2018, Type of action: CSA). This grant was provided
for the FIN-TECH project, a training programme aimed at promoting compliance with financial supervision and
technology.
Lastly, we acknowledge the cooperative relationship between the ING Group and the University of Twente. This
partnership, centered on advancing Artificial Intelligence in Finance in the Netherlands and beyond, has been of great
value to our research.
These partnerships and funding sources have greatly contributed to our ability to conduct rigorous and impactful
research. Our findings are our own and do not necessarily represent the views of the supporting institutions.
35

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The Mysteries of Share Buyback Execution: Trading Anomalies, Benchmarks, and Psychological Misconceptions

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The Mysteries of Share Buyback Execution: Trading Anomalies, Benchmarks, and Psychological Misconceptions

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T HE M YSTERIES OF S HARE B UYBACK E XECUTION : T RADING

A NOMALIES , B ENCHMARKS , AND P SYCHOLOGICAL

Joerg Osterrieder Michael Seigne

Department of Hightech Business and Entrepreneurship

July 15, 2023

Electronic copy available at: https://ssrn.com/abstract=4511382

1.1 The Role and Relevance of Share Buybacks in Finance . . . . . . . . . . . . . . . . . . . . . . . . . 4

1.2 The Identified Anomalies in Share Buyback Execution . . . . . . . . . . . . . . . . . . . . . . . . . 4

1.3 Objective and Approach of the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.1 Basic Concepts and Frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.2 The Concept and Perception of Share Buybacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2.3 Factors Influencing Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2.4 Share Repurchases and Financial Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.5 Information Signalling and Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.6 Impact and Consequences of Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

2.7 Dividends and Payout Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

2.8 Share Repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2.9 Corporate Financial Decisions and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2.10 Managerial Perspectives and Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2.11 Regulatory and Geographical Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.11.1 Regulatory Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.11.2 Geographical Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.11.3 Interaction of Regulatory and Geographical Factors . . . . . . . . . . . . . . . . . . . . . . . 14

2.12 Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

3 The Trading Schedule Anomaly 15

3.1 Trading Schedule Anomaly: Overview, Significance, and Empirical Examination . . . . . . . . . . . 15

3.2 Trading Schedule Anomaly: A Detailed Examination . . . . . . . . . . . . . . . . . . . . . . . . . . 16

3.3 Empirical Examination of the Trading Schedule Anomaly . . . . . . . . . . . . . . . . . . . . . . . . 17

3.4 Trading Schedule Paradox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

4 The Benchmark Paradox 20

4.1 Understanding the Benchmark Paradox: Explanation and Impact . . . . . . . . . . . . . . . . . . . . 20

Electronic copy available at: https://ssrn.com/abstract=4511382

4.2 Effects of the Benchmark Paradox on Share Buybacks . . . . . . . . . . . . . . . . . . . . . . . . . 21

4.3 Consequences and Implications of the Benchmark Paradox . . . . . . . . . . . . . . . . . . . . . . . 21

5 The Psychological Misconception 22

5.1 The Psychological Misconception: Explanation and Influence . . . . . . . . . . . . . . . . . . . . . . 22

5.2 The Nexus of Psychological Factors in Share Buyback Decisions . . . . . . . . . . . . . . . . . . . . 22

5.3 The Psychological Misconception’s Impact on Share Buybacks . . . . . . . . . . . . . . . . . . . . . 23

5.4 Discussion on Implications and Potential Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

6 Optimizing Share Buyback Execution Using Genetic Algorithms 24

6.1 Introduction to Genetic Algorithms and Their Relevance to Share Buybacks . . . . . . . . . . . . . . 24

6.2 The Buyback Optimization Problem: A Closer Look . . . . . . . . . . . . . . . . . . . . . . . . . . 25

6.3 Designing the Genetic Algorithm: Selection, Crossover, and Mutation . . . . . . . . . . . . . . . . . 26

6.3.1 Initial Population Generation and the Notion of ’Fitness’ . . . . . . . . . . . . . . . . . . . . 26

6.3.2 Selection and the Survival of the Fittest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

6.3.3 Crossover: Combining the Best of Both Worlds . . . . . . . . . . . . . . . . . . . . . . . . . 26

6.3.4 Mutation: Introducing Random Variations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

6.3.5 Iterative Evolution Towards an Optimal Solution . . . . . . . . . . . . . . . . . . . . . . . . 26

6.4 Applying the Genetic Algorithm to Share Buyback Optimization . . . . . . . . . . . . . . . . . . . . 27

6.5 Evaluating the Performance of the Genetic Algorithm . . . . . . . . . . . . . . . . . . . . . . . . . . 27

6.6 Implications and Future Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

7 Discussion and Analysis 30

7.1 A Comprehensive Overview: Interlinking the Anomalies . . . . . . . . . . . . . . . . . . . . . . . . 30

7.2 Theoretical and Practical Implications of the Identified Anomalies . . . . . . . . . . . . . . . . . . . 31

7.3 Future Directions for Anomaly Research in Share Buybacks . . . . . . . . . . . . . . . . . . . . . . 32

8.1 Recap of Key Findings and their Significance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

8.2 Reflection on the Study’s Contribution to Share Buyback Execution . . . . . . . . . . . . . . . . . . 33

8.3 A Look Ahead: Anticipating Future Developments and Directions . . . . . . . . . . . . . . . . . . . 34

Electronic copy available at: https://ssrn.com/abstract=4511382

1.1 The Role and Relevance of Share Buybacks in Finance

1.2 The Identified Anomalies in Share Buyback Execution

Electronic copy available at: https://ssrn.com/abstract=4511382

1.3 Objective and Approach of the Study