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2023 Feb/27
Indirect Acquisition of Treasury Stocks: Problems and Proposed Regulatory Improvements
Issue Papers 23-07
PDF
- Research Topic Capital Markets
- Page 22
- Summary
- Over the past two years, many firms have opted to acquire their treasury stocks through trust contracts, aiming to respond to sudden stock market fluctuations and shocks. Between the first quarter of 2020 and the third quarter of 2022, the number of disclosures related to indirect acquisitions surged to 671, compared to 449 for direct acquisitions. However, indirect acquisitions have been under-researched, contributing to a lack of understanding about this issue among market participants. This study examined the existing regulations on treasury stock acquisition through trust contracts and analyzed the stock price responses both before and after each disclosure.
Regulations concerning indirect acquisitions offer more flexibility compared to those governing direct acquisition. A trust contract can be extended, allowing for a longer duration and potential acquisition or disposal during the contract period. Furthermore, no sanctions are imposed even when the disclosed amount is not acquired. These regulatory aspects make a trust contract an efficient tool for firms to manage their treasury stocks. However, this also presents a challenge: Investors find it difficult to estimate the size or timing of the actual transaction associated with the contract.
Such regulatory aspects inherent in indirect acquisitions influence stock price reactions. Both direct and recent indirect acquisitions caused stock prices to rebound during market downturns. The price increase during the 30 days following the disclosure of indirect acquisitions was 3.94 percentage points lower compared to direct acquisitions. Extensions of trust contracts did not have an immediate impact on the market but resulted in a gradual increase in returns and a significant rise in stock prices. Since the disclosure for contract extension does not provide any details about the plan or balance of the acquisition, investors cannot estimate the timing or size of the actual transaction.
Comprehensive reform is necessary for the regulation of indirect acquisitions, given the significant disparities in regulatory strength between indirect and direct acquisitions. In an effort to reduce the information gap between firms and investors, this study proposes regulatory enhancements that restrict the extension of trust contracts, enhance disclosure regarding contract extensions, and apply regulations on the disposal of treasury stocks by trusts as rigorously as those on direct acquisitions. Looking ahead, it is imperative for market participants to engage in more fundamental discussions about the necessity of trust contracts, considering the intrinsic objectives of acquisitions by trusts and their benefits to the market.