Most investors are pleased when companies decide to buy back shares; it means that they get a share of the business's surplus cash and the balance sheet ends up looking more streamlined and competitive.

But no matter how good share buybacks look on paper, the managers who decide whether or not to go ahead with such a plan are often putting their own vested interests ahead of the company's, according to research by Steven Young, a professor of accounting at Lancaster University Management School.

The critical factor is whether managers' salary packages include an earnings per share (EPS) element — in other words, that some or all of their bonus depends on the company's profitability. EPS arrangements are designed to make sure that managers are rewarded when the company succeeds; however, in combination with share buybacks, they can be used to inflate pay.

The theory is that managers perform well, companies become more profitable, earnings per share increase and thus managers are rewarded. However, it is also possible artificially to increase EPS through a share buyback. This means that it is in the managers' interests to promote repurchase schemes whether or not they are the best possible choice for the company.

Professor Young said: “I would be hesitant to suggest that managers are behaving inappropriately. However, there is a link between management compensation plans, EPS and the likelihood that there will be a share repurchase. One interpretation is that managers are feathering their own nests by ripping off shareholders ... but in their defence they are only responding to the system in which they find themselves operating.”

The problem lies with the way such bonus systems are set up and the level of monitoring provided by shareholders. “I find it quite surprising that shareholders do not ask more questions about why managers are making these decisions,” Professor Young said.

The decision to repurchase shares could mean that companies miss out on other investment opportunities that could make the business more profitable in the future. “One of the most obvious questions that shareholders should ask managers is what the EPS would have been had the repurchase not taken place,” he said. There is also a strong argument for managers' bonuses to be based on this figure.

However, investors may recognise what is happening but see it as a price that has to be paid. “Institutional shareholders certainly understand the link between share repurchase and EPS; on the other hand, they like distributions of cash, they like firms that pay dividends and traditionally they really like firms that repurchase shares, particularly if there is a concern that managers might otherwise use the cash wastefully,” Professor Young said.

“The real concern that institutional investors have is that if you give managers large amounts of cash, they will make bad investments.” There have been plenty of examples of that in the past, so when they balance the risk of less growth but some cash in hand against possible growth or possible waste and no money, cash distribution wins.

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