If paying excessive CEO salaries is the most maligned use of corporate funds, stock buybacks may well take second place. Conventional wisdom is that CEOs buy back stock to manipulate the short-term stock price. They fund the buyback by cutting investment, and so firm value suffers in the long-term. As Senator Elizabeth Warren argued, “stock buybacks create a sugar high for the corporations. It boosts prices in the short run, but the real way to boost the value of a corporation is to invest in the future, and they are not doing that.” The UK Government is launching an inquiry into buybacks, due to concerns that they “may be crowding out the allocation of surplus capital to productive investment.” And in 2014, HBR published a lengthy feature critical of the practice.
Such a nefarious use of corporate funds makes for great headlines. But these claims are very rarely backed up by large-scale evidence, and often driven by a misunderstanding of how buybacks actually operate.
Author: Alex Edmans
Source: “Harvard Business Review”
Subjects: Corporate Governance, Finance, Management, Strategy
Click to Add the First »