U.S. Chamber Study Finds Company Buybacks Benefit All Shareholders
WASHINGTON — When a company buys back its own shares to reduce the amount of available stock in the open market, it benefits investors and decreases market volatility, freeing up capital for companies to better allocate it, according to a new U.S. Chamber of Commerce study.
The study released yesterday by the Chamber’s Center for Capital Markets Competitiveness, found that this strategy of stock repurchasing – commonly known as buybacks – results in a benefit to all shareholders. And the study points out the practice is particularly beneficial to retail investors – who now make up about 23% of market participation – estimating a savings of $2.1 to $4.2 billion from 2004 to 2020.
Critics of this practice say there should be limits on buybacks or even a ban, stating that it could affect firms’ payout decisions and harm the ability of a company to increase employee wages or invest in research and development.
However, the study’s 17-year sample timeframe of more than 10,000 listed companies in the U.S. points out a different scenario. It states that “stock buybacks have beneficial but often overlooked effects on stock price stabilization” and benefits that extend to all shareholders, not just those owning the stock.
For these non-investor stakeholders, the study says that the practice does not “shortchange investments in the company and its employees,” but tends to do the opposite by freeing up funds for capital expenditures and additional R&D.
Moreover, the study added that firms are more likely to reinvest the stock buyback funds locally and therefore do not harm the community investments. Limiting the buybacks, it added, would hurt employment growth by limiting the extra capital the investors would have to “reinvest in young and growing private firms.”
The study claims that buybacks have a positive effect on stock price stabilization through contributing to stock liquidity – quick transactions with minimal price impact – and lessening stock volatility by having more stable prices.
“By providing price support during periods when selling pressure is relatively high, buybacks benefit investors by reducing the downside risk of their investment,” the study said, pointing out this is particularly helpful for retail investors who also represent 10% to 20% of order flow, which is the number of orders to buy or sell stocks.
“These values equate to retail investor savings of $126 to $253 million per year due to buyback activity,” according to the study, as the greater liquidity also reduces the costs of transactions for retail investors
This reduced market volatility leads to more stable prices and allows managers to mitigate policy uncertainty and price pressure as they tend to respond to them by strengthening and expanding their stock buyback activities, respectively, according to yesterday’s release.
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