MIT Sloan Management Review Article on The Case Against Restricting Stock Buybacks

Are stock buybacks as bad as they’re made out to be? The ubiquitous corporate practice of repurchasing shares has been the focus of much political and media scrutiny. The federal Inflation Reduction Act of 2022 included a 1% excise tax on repurchases (which President Biden has proposed increasing to 4% in his 2024 budget). In addition, senior Democrats have shown interest in barring executives from selling shares for three years after a repurchase, the federal government has suggested that companies that give up buybacks will receive preferential treatment, and the Securities and Exchange Commission has proposed a significant increase in the extent and frequency of repurchase reporting.

The debate on the economic consequences of stock buybacks has so far tended to focus on small samples or cherry-picked examples. Given that thousands of companies repurchase their shares each year, and aggregate repurchases have exceeded $500 billion annually for the past five years, we decided that a large-sample study of repurchasing behavior was warranted. Our study, published in the journal Financial Management, outlines the benefits of the practice, as stated by its proponents, and provides evidence that casts doubt on the alleged costs cited by its critics.

About the Author

Nicholas Guest is an assistant professor of accounting at the Johnson Graduate School of Management at Cornell University. S.P. Kothari is the Gordon Y. Billard Professor of Accounting and Finance at MIT’s Sloan School of Management, where he was previously deputy dean. Parth Venkat is an assistant professor of finance at the Culverhouse College of Business at the University of Alabama.

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