This is a great article about a practice that most investors (and many analysts) do not yet understand. As described, the repurchasing company's counter-party delivers "borrowed shares" to the company, which may recognize an immediate reduction in share count for the calculation of earnings per share.

But there has been no reduction in shares outstanding at the time the deal is struck because the economic ownership of the lending institution has NOT changed. From an economic and transactional perspective, the company is buying shares from a dealer who sells those shares "short." The short interest of the company is increased by this transaction and the actual number of outstanding shares is not reduced.

Why would a dealer risk capital by shorting millions of shares of stock to a repurchasing company without seeking a hedge in the marketplace? In fact, these deals are usually struck between the company and the counterparty without venturing into the open marketplace. If they went to the open market to hedge their short, they would effectively transfer the company's buying pressure into the market.

In fact, the company and the counterparty dealer often strike a deal where the company provides a hedge to the dealer in the form of OTC (over-the-counter) options, so the dealer's loss if the stock trades higher is capped, and also the dealer's gain if the stock trades lower is likewise capped. Then, the company and dealer work together to "unwind" the short position in the open market, and simultaneously unwind the hedge.

Should companies employing this strategy be able to recognize a reduction in shares upon striking a deal with a counterparty who sells short to the company? Economically, the share count has not been reduced until the counterparty covers its short in the open market.

Also, would be interested to hear if Nidhi has any evidence to share ...