shrinking equity supply

The following note comments on the shrinking supply of equities, and how it is impacting equity prices across the board:

The analysis looks into how US equity shareholders are selling to international in investors. As far as I can tell, each stock is different. A shrinking aggregate supply would mean that in aggregate, prices would rise, but value wouldn’t change. The “number of outstanding shares” * “the price” stays more or less equal before and after a buyback because they imply the same underlying value. From the above we can also see they are inversely related, but this is an arithmetic relation without significant economic rationale.

In fact, based on empirical research, the winners are the initial shareholders. In take private transactions, from the moment of the initial announcement to the finalization of a deal, initial shareholders earn abnormal returns. According to Eric at “these transactions confer large stock-price gains on target shareholders, averaging about 30 to 50 percent over preoffer prices during the eighties.”

For a particular company, it also doesn’t make a difference from the perspective of company Enterprise Value (EV). At the moment of the transaction, it’s just a change of owners.


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