The attack on share buybacks

Abstract

Corporate share buybacks are under attack, mainly from the political left, but also to some degree from the right. Critics advocate increasing the tax on buybacks in the hope of inducing firms to invest more and in ways that benefit workers. This attack on buybacks reflects a misunderstanding of basic (textbook-level) finance principles. The approach advocated by critics will backfire at growth-stage firms, which will invest less, not more, because a payout-tax increase will reduce the supply of equity infusions. At mature firms that are generating ample free cash flow, managers can easily evade the (unattractive-for-shareholders) real investments that critics desire by investing retained cash in financial assets. Buyback critics should recognise that punishing cash payouts per se would be counterproductive, and should focus instead on making a case for legislation that creates incentives that directly promote the specific behaviours they desire.