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CFA Institute: Answer Three Questions to Rebuild Trust



May 17, 2012 – Comments (0)

CFA Institute: Answer Three Questions to Rebuild Trust 


The CFA Institute is looking for ideas to rebuild investor trust in the financial markets. Source: 

Answer three questions to rebuild trust. 


Question 1.

Explain how exchanging cash for shares returns monies to shareowners'.

An article by the CFA Institute seems to suggest share repurchases returns money to owners.Source:.

Let's make the process simple. 

The firm has two shares of stock outstanding. Investor A & B each own one share and are passive investors. The firm uses owners' cash, or borrows cash, to buy one share of stock. Investor A is approached and sells their share. Investor B wasn't given an opportunity to sell their share back to the firm. This propels investor B from a 50% to a 100% owner.  The firm now has no excess cash, and might have a heavy debt load.

Let us review who got the "cash.” 

Investor A  

Received cash.  

Owns no shares.  

The shares were exchanged for cash.  

Has no ownership stake. 


Investor B  

Received no cash.  

Holds one share of stock.  

Has 100% ownership stake.  

Is waiting for cash to be returned. 


Did investor A or investor B enjoy the cash? Does that confirm the claim that share repurchases return money to its owners?

 Question 2.

Explain to Yahoo shareholders how the over $8 billion used, (since inception), to repurchase shares, was returned to them.  Alternatively, why the share repurchase failed to add value.

The price of Yahoo stock has generally declined since share repurchase activity increased. 


Question 3. 

Explain why it was prudent for Bank of America (BAC) to pay out collectively, dividends plus share repurchases, more than its net income the past ten years?  And how long-term investors benefited.. 


If the CFA Institute wants investors to trust its CFA's. Then answers to the above three questions would be a start. 


Bonus questions:

"Never engage in misleading sales promotions".Source:

Bonus Question A.

Explain why it isn't misleading to suggest that share repurchases return money to its owners.


Bonus Question B.

Explain why CFA's favor treating investors differently, some given the opportunity to sell shares back to the firm and many others are not. It that fair dealing? 


Why investors should care:

Without information that can be trusted, the market structure cannot be supported and economic growth may suffer.   

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