Many critics say buybacks crimp investment. But the real problem is that – unlike dividends – buybacks can be used to systematically transfer wealth from shareholders to executives..
There is a problem with share buybacks – but it isn’t the one many critics and legislators are obsessed with.
Some critics claim that repurchases starve firms of capital they could invest for the long term, harming workers to enrich shareholders. Democratic Sens. Chuck Schumer of New York and Tammy Baldwin of Wisconsin agree and have introduced legislation to “rein in” corporate stock buybacks. The bill would give the Securities and Exchange Commission authority to reject buybacks that, in its judgment, hurt workers. It also would require boards to “certify” that a repurchase is in the “best long-term financial interest of the company.” Sen. Baldwin has introduced another bill, co-sponsored by Sen. Elizabeth Warren (D., Mass.), that goes even further: It bans all open-market repurchases.
This criticism of buybacks is flawed; there is simply no evidence that the overall volume of dividends and repurchases is excessive. The real problem with buybacks is that they tend to enrich executives at the expense of shareholders. Fortunately, there is a simple remedy.
Buyback critics say S&P 500 firms don’t have enough investment capital because dividends and repurchases routinely exceed 90% of their net income. Between 2007 and 2016, for example, these companies distributed $7 trillion to shareholders, mostly via repurchases. That was 96% of total net income. But our research shows that public firms recover from shareholders – directly or indirectly – about 80% of the capital distributed via repurchases. Shareholders return this capital by buying newly issued shares, mostly from employees paid with stock, but also directly from firms. Taking into account all types of equity issuances, net shareholder payouts in S&P 500 firms during the decade 2007-2016 were only about $3.7 trillion, or 50% of total net income.
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