Collateralization of Artificially Inflated Stocks as a Way of Generating Profit – “Clean Cashback”

Abstract

The issue of enrichment through artificially inflated stock prices has become especially significant in the past decade due to the increasing number of lawsuits filed against various publicly listed companies. The purpose of this study is to thoroughly examine the income generation process resulting from the collateralization of artificially inflated stocks and to assess the possible profitability of this operation for all parties involved. The research hypothesis is the possibility of an income-generating scheme based on the process of depositing overvalued securities of companies under securities-backed lines of credit offered by financial institutions around the world. The essence of the research procedure is a step-by-step study of two processes: capital round-tripping as a means of stock price inflation, and subsequent pledging of shares for a line of credit, and the application of the DuPont formula to calculate return on investment. The main results indicate that the potential beneficiary's cashback could reach approximately 180% of the initial investment, subject to a four-fold increase in share price. Bank profitability ranges from 28.6% in the worst-case scenario to around 80% in the best case scenario for this credit transaction. The theoretical and practical significance lies in the introduction and definition of the term "Clean Cashback" for scientific research, the visualization of the income generation process, and the development of a methodology to calculate profitability for all participants involved. One additional avenue for future research is examining the stock market's reaction to the collapse of inflated stock prices, considering the time lag before margin calls.