Optimising debt to equity and share repurchases
This is a paper aims to explore the mechanical effect of a company’s share repurchase on earnings per share (EPS). In particular, while a share repurchase scheme will reduce the overall number of shares, suggesting that the EPS may increase, clearly the expenditure will reduce the net earnings of a company, introducing a trade-off between these competing effects. We first of all review accretive share repurchases, then characterise the increase in EPS as a function of price paid by the company.
Subsequently, we analyse and quantify the estimated difference in earnings growth between a company’s natural growth in the absence of buyback scheme to that with its earnings altered as a result of the buybacks. We conclude with an examination of the effect of share repurchases in two cases studies in the US stock-market.
Parameterization of growth and risk
On Variance and Persistence of Financial Assets
With the rise of passive investment over recent years the following aims to quantify the change in variance as a result of these strategies. We firstly distinguish between momentum and reversal strategies. Secondly, we consider only the ‘sign process’ of the resulting closing prices, i.e. the sequence of +1 and -1 corresponding to the sign of the return. In this light we construct a probabilistic model such that the sign of the next day’s closing returns is equal to the sign of the current day’s closing returns with probability p.
We show that in the long run, the per-day variance of this process is inflated by a factor of p/(1 − p) as a result of the autocorrelations arising from passive investment. In particular we show that reversal strategies contribute to a reduced volatility (p < 12) whereas momentum strategies contribute to an increased volatility (p > 12). Empirical analysis of 2,000 stocks listed on the NASDAQ suggests that the prevailing strategy is that of reversal, suggesting the volatility of this process is reduced as a result of passive trading.
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