Harvard Professors Warn of Buybacks "Bogeyman" in Light of New Legislation
March 30, 2019
This week Senator Tammy Baldwin introduced legislation that would repeal the SEC rule that allows companies to buy back stock on the open market, going even further than promises by Senators Schumer and Bernie Sanders to condition buybacks on substantial investment by companies in workers and communities. Building on earlier research, in a recent article Harvard Professors Jesse Fried and Charles Wang Popular warn that such rhetoric is based on a “profound misunderstanding of how the U.S. economy works.” According to Professor Fried and Professor Wang, the “accepted wisdom among Democratic leadership [on buybacks] is flat out wrong” and “there is simply no evidence that the overall volume of corporate payouts to shareholders, through repurchases and dividends, is excessive.” Further, they note that “if enacted, such bills could threaten not only the capital markets but the employees and communities the Senators claim to care about.”
According to their research, shareholders return most of the capital distributed by share buybacks. The research discusses how between 2007 and 2016, 96% of total net income was distributed to shareholders mostly through share buybacks. However, 80% of the capital distributed via buybacks is recovered from shareholders – directly or indirectly. The authors note that this trend continued through the end of the third quarter of 2018, after the 2017 Tax Act had gone into effect. The article continues, noting that at this level, buybacks do not impair the ability to firms to pay workers while also citing statistics that show that capital expenditures as well as research and development expenditures are at the highest levels ever. Further, the article notes limitations on buybacks would severely restrict the ability of companies to return capital to shareholders, which fuels the financing of new and innovative private firms, which are vital to economic growth.
Concluding, the article warns that restrictions on buybacks and dividends would cause “large public companies will mis-invest and mis-spend their excess cash, and private firms will be deprived of much needed growth capital.”