This summer, David Ikenberry presented his research paper titled “Do Repurchases Cause Harm? Evidence from Buybacks by Financially Distressed Firms” on July 31st, 2024 at the World Finance Conference in Nicosia, Cyprus.
The paper was also authored by:
Theo Vermaelen – INSEAD (France)
Guanqun Zhou – University of Colorado (United States)
Here is the abstract from the paper:
Skeptics argue that stock buybacks in general are harmful. They argue that managers prioritize self-interest over investing in economically beneficial projects, to the detriment of employees and bondholders. Several U.S. politicians echo these concerns and have proposed legislation either restricting or eliminating buybacks. Recently, the Biden administration implemented a 1% excise tax and is proposing to quadruple the levy. This contrasts with a rich literature showing that buybacks on average are beneficial. Yet from a regulatory view, these studies are weak as the analysis is dominated by healthy companies and tends to focus narrowly on shareholders thus obfuscating any potential harm that might be caused. Using principles of regulatory paternalism, we look more carefully for harm to various stakeholders among financially vulnerable firms. Even in these more extreme cases, we find little evidence that buybacks cause harm nor do we observe any material sign of underinvestment. These most vulnerable firms seemingly demonstrate restraint when executing buybacks, perhaps due to natural market disciplining forces from debt markets. Our findings provide no motivation for regulatory intervention either limiting or altogether terminating the transaction.
