Stock Buybacks: Leverage Vs. Managerial Self-Dealing

Consider a company that has been earning profits, and wants to pay or all of those earnings to its shareholders. There are two practical mechanisms for doing so. Traditionally, the best-known approach was for the firm to pay a dividend to shareholders. But in the last few decades, many US firms instead have used stock buybacks. How substantial has this shift been, and what concerns does it raise? 

Here, I'll draw upon a couple of recent discussions of stock buybacks. Siro Aramonte writes about "Mind the buybacks, beware of the leverage," in the BIS Quarterly Review (September 2020, pp. 49-59). Kathleen Kahle and René M. Stulz tackle the topic from a different angle in "Why are Corporate Payouts So High in the 2000s? (NBER Working Paper 26958, April 2020, subscription required). 

Kahle and Stulz present the evidence both that overall corporate payouts to shareholders are up in the 21st century, and that stock buybacks are the primary vehicle by which this has happened. They calculate that total payouts from corporations to shareholders from 2000-2017 (both dividends and share buybacks) were about $10 trillion. They find that corporate payouts to shareholders have risen substantially post-2000 and that stock buybacks are the main vehicle through which this has happened. They write: 

In the 2000s, annual aggregate real payouts average roughly three times their pre-2000 level. ... Specifically, in the aggregate, higher earnings explain 38% of the increase in real constant dollar payouts and higher payout rates account for 62% of the increase. ...

In our data, the growth in payout rates, defined as the ratio of net payouts to operating income, comes entirely from repurchases. This finding is consistent with the evidence in Skinner (2008) on the growing importance of repurchases. Dividends average 14.4% of operating income from 1971 to 1999 and 14% from 2000 to 2017. In contrast, net repurchases, defined as stock purchases minus stocks issuance, average 4.8% of operating income before 2000 and 18.3% from 2000 to 2017.
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