April 05, 2019
Two Harvard Professors released research warning the current buyback rhetoric is based on a “profound misunderstanding of how the U.S. economy works.” The research referenced Sen. Tammy Baldwin's (D-WI) recently reintroduced legislative proposal that would ban corporate buybacks completely.
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,” according to Professors Jesse Fried of the Harvard Law School and Charles Wang of the Harvard Business School.
"If enacted, such bills could threaten not only the capital markets but the employees and communities the Senators claim to care about,” the paper continues, referencing earlier legislative promises in the Senate by Sens. Bernie Sanders (I-VT) and Chuck Schumer (D-NY) that would condition buybacks on substantial investment by companies in workers and communities.
Companies recover most of the capital distributed through share buybacks, according to the research, which details 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 was recovered from shareholders—directly or indirectly. This trend continued well after the 2017 tax reform law took effect.
The article notes 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. The article concludes by warning that under restrictions on buybacks and dividends, “large public companies will mis-invest and mis-spend their excess cash, and private firms will be deprived of much needed growth capital.”