What the hell are stock buybacks?

[DGUtley]

I think it is a good thing for shareholders, generally.

[carolina73]

I think it is a good thing for shareholders, generally.

It depends.

Did the CEO do it to get a bonus based on the short term lift.

Or should he invested in in efficiency or expansion.

[LWW]

The company is the same. It is a paper drill.

The company is the same, yes.

But, if it had 100 shareholders each holding an average of 1% … reducing that to 80 shareholders means that each now has 1.25% ownership on average. The other twenty took the profit. All benefited.

[Peter1469]

Stock buybacks don't really matter

Once again, the issue of stock buybacks has shouldered its way into the national discourse. In his State of the Union address, President Biden called for a quadrupling of the tax on buybacks — up from the current 1% implemented by the Inflation Reduction Act. Stopping these buybacks (also called “share repurchases”) has been a progressive policy idea for quite a while now — the idea being that if companies can’t buy back their own shares, they’ll use their cash to invest and grow and hire workers and raise wages instead. Boosting investment is a big part of Biden’s economic approach. (And in fact, it’s not just a progressive idea — Donald Trump wanted to do the same thing.)


In fact, as I’ll explain, this hope is probably in vain; in practice, making repurchases more expensive likely won’t do much to increase hiring or wages. But there’s another reason lots of people want to tax or even ban buybacks; they think buybacks pump up the price of a company’s shares, giving an untaxed windfall to shareholders. Interestingly, this is also wrong; as I’ll explain, a stock buyback should have only a small effect on the price of the stock, and it’s not clear whether the effect will be positive or negative.


In fact, stock buybacks probably just don’t matter much, either in terms of labor markets or in terms of investor wealth. The people who say that repurchases are just another way companies return cash to investors — a sort of fancy dividend — are basically right. There are some tax advantages for buybacks, but they aren’t nearly as big as people think.


So really, buybacks just doesn’t matter much. This means that if we tax them more heavily, the results are likely to be underwhelming. But it also means that taxing buybacks won’t do the economy much harm, either; companies will just have to learn to use dividends to replace buybacks. At worst, it serves as a distraction from more effective ways of boosting corporate investment and raising wages. Thus, I’m not excited for Biden’s buyback tax, but I’m hardly worried that it’s going to devastate corporate America.


Anyway, now let’s dive in and talk about the various reasons that buybacks aren’t important. First of all, let’s address the thing people most commonly get wrong: the effect of buybacks on share prices.