Buybacks were illegal throughout most of the 20th century because they were considered a form of stock market manipulation. But in 1982, the Securities and Exchange Commission passed rule 10b-18, which created a legal process for buybacks and opened the floodgates for companies to start repurchasing their stock en masse.
Beyond the equity issue, there’s serious evidence to show it’s reducing business investment and innovation.
Corporate profits and cash reserves are at an all-time high. However, many companies have been spending an increasing share of profits and cash on buying back their own shares while the share of profit spent on investment in equipment and structures is often falling. We examine these concurrent trends and attempt to answer whether corporate share buybacks can indeed reduce overall investment.
RECENT years have seen corporations accumulate unprecedented profits and cash reserves. Corporate managers have increasingly used this cash to buy back their own shares. This has attracted the attention of researchers concerned about the perceived focus of management on short-term stock prices at the expense of investment. We examine the overlapping trends of increasing share buybacks and decreasing the share of corporate profits spent on physical investment. We look at the suggested drivers of these trends—and at the question of whether share buybacks can indeed reduce overall investment.
Chuck Schumer and Bernie Sanders call for restricting corporate share buybacks
The two senators argue for limiting buybacks unless companies raise worker pay, boost benefits and invest in their business.
Large companies are buying back shares while laying off workers, closing stores and shuttering factories.
Last year, more than $1 trillion of corporate share buybacks were announced.