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What the Main Criticisms of Stock Buybacks Get Wrong

3 min readBy: Nicholas Anderson, Erica York

Stock buybacks are making headlines again, with a new report from the Roosevelt Institute criticizing the practice. The report claims that stock buybacks are “plundering a company’s resources at the cost of a company’s long-term wellbeing.” The report argues that investments in capital, research and development (R&D), and worker training are displaced by stock buybacks. It also argues that buybacks are short-sighted, benefiting executives at the expense of the other employees. Analyzing these three arguments shows they are superficial, fail to account for key points, and lack supporting evidence.

“The growth of stock buybacks coincides with lower levels of corporate reinvestment overall, as companies have reduced spending on developing new businesses, hiring workers, and establishing new operations.”

The perception that the choice is between stock buybacks or investment is false. This idea is superficial; it fails to see how companies have cash to engage in stock buybacks in the first place. First, for a company to earn a positive net income, previous investments in capital, R&D, and worker productivity must have been made, and been successful. Positive net income is the reward for making good investments. Second, companies generally only consider engaging in stock buybacks when they have exhausted their investment opportunities: it is residual cash flow, or what is left over after companies have made their investments, that is used for buybacks.

For companies with more cash than investment opportunities, the real choice is between buybacks or having the cash sit effectively idle. Additionally, evidence doesn’t indicate that stock buybacks have a causal relationship with business investment, negative or positive.

“Corporate America’s decision-making, [is] leading to more and more profits moving up and out of corporations—at the expense of workers, business investment, and long-term economic growth.”

Stock buybacks do move profits out of corporations, but, as briefly explained above, this is not at the expense of workers, investment, or long term economic growth. In some instances, if companies were to retain cashflow when they do not have viable investment opportunities, it could lead to practices such as “Empire Building.” These are sub-par investments, made to increase a company’s prestige or the appearance of buildings, for example, but that have little to do with improving productivity. Ultimately, the level of wages, investment, and long-term economic growth is not determined by the level of stock buybacks; there is little to no evidence supporting such a claim.

“Stock buybacks increase the pay disparity between corporate executives, especially CEOs, and the average worker by reducing the money spent on workers’ wages and increasing the CEO earnings from stock-based compensation.”

Economic evidence does not indicate a relationship between stock buybacks and worker pay. Instead, real wage growth is determined by worker productivity.

To the extent that CEOs are paid in stock options, they can, and do, benefit if a stock buyback results in the company’s share price increasing. However, employees may also benefit if they have 401(k)s or own company stock. Owning more company stock could also increase the incentives a CEO faces to make productivity-enhancing investments Again, it is important to understand that research shows stock buybacks do not come at the expense of other uses, and they are not a determinant, negative or positive, of wage growth.

To conclude, stock buybacks are a clearly visible phenomenon, but most critics point out the initial action, the buyback, and ignore the greater context. Stock buybacks do not come at the expense of capital investment or other economic activities, instead, they are a tool for companies to return excess cash to shareholders after the company has met its other obligations. Stock buybacks do not deprive firms of cash that they would otherwise use for investment and paying workers.