Share Buybacks: Mismeasured and Misunderstood

In March of this year,Forbespublished an article with the following lede:The Economist has called them “an addiction to corporate cocaine.” Reuters has called them “self-cannibalization.” The Financial Timeshas called them “an overwhelming conflict of interest.” In an article that won the HBR McKinsey Award for the best article of the year, Harvard Business Review has called them “stock price manipulation.” These influential journals make a powerful case that wholesale stock buybacks are a bad idea—bad economically, bad financially, bad socially, bad legally and bad morally.There is no shortage of hand-wringing over “excessive” stock buybacks, either in the academic literature or in the popular media. Such criticisms are misguided in two crucial ways. Methodologically, they overstate the scale of the problem (such as it is) by observing gross payouts instead of payouts net of issuance, and by neglecting the extent to which firms are simply substituting low-interest debt for equity financing. Second, while accusing shareholders of myopia and executives of cupidity, such critics are not taking a properlypanoptic view of the function that buybacks serve in the broader equity ecosystem.    I.A 2018 report by the Roosevelt Institute cites a statistic that lies at the heart of alarmism over the size and scale of stock buybacks:Over the last decade-and-a-half, firms have sent 94 percent of corporate profits out to shareholders, in the form of buybacks...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs