Spinoffs, Buybacks, and Splits -- Oh My!

Spinoffs, share buybacks, stock splits, insider purchases — investors’ ears often perk up at the mention of these corporate moves. But are they really reliable stock indicators? In a recent piece for The Wall Street Journal, Liam Pleven and Joe Light take a look.

While a good deal of research shows that companies that engage in these actions can outperform the market, Pleven and Light also advise caution. “Investors can’t know all the considerations and motives that executives are weighing when they act, so the risk of misinterpreting a signal is high” according to some of those who invest in these types of companies, Pleven and Light say. “Moreover, other factors tied to a company’s bread-and-butter business likely have a larger influence on share prices. As a result, investors drawn to the strategy need to examine a firm’s finances and prospects more closely.”

Pleven and Light talk with a number of researchers who have studied the performance of spinoffs and firms that buy back shares, have high insider buying, split their stock, etc. Some offer interesting findings combining these variables. For example, a new study performed by Alice Bonaimé of the University of Kentucky and Michael Ryngaert of the University of Florida found that the performances of companies that bought back shares varied greatly when you also looked at insider buying.

“In the three years after a buyback announcement, companies with net insider buying had an extra total return of 16.9 percentage points, after adjusting for size and value, while companies with net insider selling had an extra return of only 1.2 percentage points, the research found,” Light and Pleven note.