Yet another claim is that much of the market rise

Info icon This preview shows pages 5–7. Sign up to view the full content.

Yet another claim is that much of the market rise over the last few years has been from buybacks. The numbers don't bear this out. The direction is plausible, as researchers have found that share prices do tend to increase -- by around 1% -- when buybacks are announced. Several explanations have been offered for this positive reaction including that investors see repurchases as a signal that management thinks shares are undervalued, and that investors cheer when management returns cash to shareholders rather than, perhaps, wasting it on "empire building." These explanations are behavioral effects at the margin. But critics often assume that shareholders moving cash from the corporate balance sheet to their personal one is a pure windfall -- never mind that they own the same set of assets before and after, and you can't loot yourself. It would be impossible to determine precisely how much of the more than 15% annual returns on the Russell 3000 since the financial crisis is a direct consequence of share repurchases, but there is no compelling evidence that it is more than a small fraction. 5
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Riffe – ACCT 6201 –Session 11 –Fall 2018 The most wild-eyed critics actually claim that some specific companies are giant "scams" fueled by buybacks. Apple is the most notable target of these critics, who assert that much of its approximately $1 trillion market capitalization is an illusory artifact of share repurchases. That's backward. Buybacks reduce market capitalization. Remember, buybacks are also accused of causing the stock market to "self-liquidate." What Apple is accused of is a contradiction in terms -- self-liquidating to $1 trillion. Oh, and they sold some iPhones along the way, too. While not the main focus of the critics, there are some possible problems with buybacks. If taken to excess far beyond today's levels and financed with debt, they could lead to too much leverage (aggregate leverage today is pretty normal). Moreover, there may be ways in which corporate management can use share buybacks tactically to increase the value of stock options and other incentive contracts at particular times. This can and should be fixed with contracts written to adjust for the impact of buybacks, not by eliminating the benign buybacks themselves. The bottom line is that despite a legion of attempts, there is no real case against buybacks, let alone enough to blame them for all sorts of economic ills. Much of the criticism is innumerate nonsense. Nonetheless, the various charges are repeatedly made in otherwise reputable places, with increasing stridency, by people who should know better to people who presumably don't. That suggests the attack on buybacks is a politically motivated crusade -- let's blame public corporations for all kinds of evil. Americans have lots to debate, and those critical of public corporations likely have many other worthwhile points to make. They should drop nefarious buybacks from their retinue of accusations and focus on real problems.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.
  • Fall '09
  • Robbins

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern