Stock Buybacks on Trial

A recent Wall Street Journal article highlights the results of a recent academic study analyzing claims that share repurchases are (1) a form of manipulation to increase stock price and earnings per share, (2) a way to increase CEO pay, and (3) crowding out investment while sacrificing innovation and long-term growth.  The study, by professors Nicholas Guest of Cornell University, S.P. Kothari of the Massachusetts Institute of Technology and Parth Venkat of the University of Alabama, analyzed thousands of share repurchases by U.S. exchange-listed firms over the period 1988 to 2020.  The research found “there is no widespread evidence that share repurchases enable firms to manipulate the market” or that repurchases inflate EPS.  

As to the claim that share repurchases unfairly benefit CEOs by increasing compensation, the authors found that CEOs in firms that repurchase shares realize excess pay that is “insignificant” compared to firms that did not repurchase shares. Consistent with the findings of prior research, the authors conclude that the evidence is not consistent with the claim that firms use share repurchases to “significantly boost CEO pay.”  In addressing the claim that firms that repurchase shares do so at the cost of pursuing alternative investment opportunities and growth, the research found that firms that repurchase shares are “highly profitable and have steadily made investments while at the same time returning capital to shareholders.”

The results of this study are timely in view of the politically charged view of share buybacks and the recent comments by President Biden in his State of the Union address in which he proposed a quadrupling of the 1% federal tax on share buybacks that was included in the Inflation Reduction Act of 2022.