Finally some new insights on inefficiencies in Corporate Actions:
The Oxera report (2004) on Corporate Actions is ancient history. That report counted the loss to the financial services industry at approximately $ 10 billion back then. In fact, if you go searching for quantified value of losses in Corporate Actions you will still likely chance upon the same report. That old report should now be considered dated given the industry wide changes that are likely or expected to have happened in 14 years.
OR are they?
The new report, this one from the perspective of the beneficial owners of investments, shows the industry in an unflattering light.
The highlight of this report relates to Dividends: those that involve ‘elections’. Some will recognize it as a category known as “Mandatory with Options”.
In some instances, investors have to choose between receiving dividends in cash or receiving them as scrips. Asset Managers, it seems, find it convenient to simply elect cash without applying too much thought to the consequences of this choice.
Let us say you are an investor interested in getting shares, because you think the company is going great places. In theory, if you are paid out dividends in cash, you could go out and buy shares using that money. But, will you?
On the other hand, if you receive dividends as shares, you are likely to hold on to the shares, if you consider the company as a great buy.
Then there is the taxation aspect. Depending on where the investor is resident for taxation, and depending on the tax rules, an investor may prefer receiving the dividend in either cash or in shares, in whichever case the tax is lower.
But, the study shows, all this is too much work for the Asset Management industry and they lazily just choose “cash”. That potentially costs investors up to a billion dollars in real or notional losses.
One interesting dimension of this observation relates to the ‘hunt for alpha”. If it is THAT difficult to squeeze out returns for investors, should not a firm capture all the pennies that could be earned with greater care?
If you need to understand these aspects better, go and look up some simple, short videos on Corporate Actions here and come back and read this again!
You can also write in for a copy of the report itself.