How Stock Buybacks Promote Efficiency and Strong Capital Markets

When public companies have extra cash, they frequently repurchase their stock as a means of efficiently managing that excess capital. Before the Securities and Exchange Commission (SEC) created a means for companies to buy back their stock, there was considerable evidence that some managers would use surplus cash for projects or acquisitions that were not in the best economic interest of the company. Today, share repurchase plans (also called stock buybacks) are a tool used as part of broader management strategies that help companies make healthy financial decisions and provide value to investors.

What’s the latest?

Despite these benefits, some policymakers have criticized the use of share repurchase plans, suggesting that when companies choose to buy back their stock, they choose not to make additional investments into other segments of their business, such as research and development (R&D). This, however, is a false choice: companies do not choose to buy back their stock over their planned expenditures (e.g. R&D) but rather buy back their stock with surplus capital after already fulfilling those commitments. Stock buybacks provide companies with an efficient way to make smart business decisions and manage firm value when they have excess capital that cannot be reinvested in a way that is consistent with their strategic objectives.

Other calls for limiting share repurchase plans stem from criticisms suggesting that companies manipulate the timing of their repurchases to align with the periods when internal shareholders sell their stock. Recent studies, however, show that these arguments are based on flawed research and that, in fact, alignment between internal shareholder sales and share repurchase programs can be explained by the regular schedule and cadence of the corporate calendar rather than behavior meant to create an unfair advantage.

Why it matters

Limiting or eliminating share repurchase plans would weaken U.S. capital markets. Share repurchases have been shown to help facilitate orderly market trading, reduce transaction costs, reduce market volatility, and provide retail investors with an economic benefit as large as $4.1 billion. Moreover, proposals that would limit or prohibit stock buybacks risk interfering with company governance, planning and decision-making, thereby reducing the ability of companies to manage value.

Our take: The U.S. Chamber supports policies that promote competitive, transparent, and liquid capital markets, including responsible share repurchase programs. Share repurchases promote strong U.S. capital markets and benefit everyday Americans and retirement account holders. What’s more, share repurchases help the broader economy by returning capital to shareholders who can then reinvest in innovative public and private companies of all sizes, creating efficient capital allocation across markets.

What’s next?

Share repurchase programs will continue to be a topic for debate among policymakers in Washington. The Securities and Exchange Commission recently proposed a rule for public companies that would have a cooling effect on share repurchase activity. The Chamber wrote to the SEC about its proposal, emphasizing the importance of share repurchase programs and encouraging the SEC to reconfigure the rule. In September 2021, legislation was introduced in the Senate that would impose a tax on stock buybacks. Meanwhile, President Biden’s FY 2023 budget proposal includes language that would prohibit company executives from selling their company shares for three years after the conclusion of a share repurchase program.

The U.S. Chamber continues to urge policymakers to consider the positive economic effects of share repurchases before acting to limit such programs.

Story by the U.S. Chamber of Commerce