Morgan Stanley: Which One Is It?, 2024

Research paper from Michael Mauboussin and Dan Callahan on Equity Issuance and Retirement.

The Morgan Stanley report “Which One Is It? Equity Issuance and Retirement” examines the practice of companies simultaneously issuing and repurchasing shares, analyzing its implications for capital allocation and shareholder value.

Key Insights:

The report emphasizes the importance for executives and investors to carefully consider the timing and pricing of equity transactions to ensure they align with the fundamental goal of capital allocation: enhancing shareholder value.

• Capital Allocation Principle: Effective capital allocation aims to “buy low and sell high.” Companies should repurchase shares when undervalued and issue shares when overvalued to create shareholder value.
• Common Reasons for Equity Issuance:
  • Mergers and Acquisitions (M&A): Equity-financed M&A deals constitute 58% of total equity issuance from 2000 to 2023.
  • Stock-Based Compensation (SBC): Accounts for 22% of equity issuance in the same period, with SBC as a percentage of sales increasing from 0.2% in 2006 to 1.3% in 2023.
  • Seasoned Equity Offerings (SEOs): Make up the remaining 20% of equity issuance.
• Wealth Transfer Implications: Issuing or repurchasing shares at misaligned prices can lead to wealth transfers between ongoing and transacting shareholders. For instance, repurchasing overvalued shares can harm long-term shareholders, while issuing overvalued shares can benefit them.
• Empirical Findings: Companies that both issue and repurchase shares around the same time may not effectively adhere to the “buy low, sell high” principle, potentially failing in optimal capital allocation.

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