Stock buybacks benefit retail investors, research suggests

Share buybacks provide liquidity and stabilize stock prices, generating benefits for investors, including retail investors, argues a new paper from the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC).

The business lobby group released a study that examines the phenomenon of stock buybacks, which have been criticized as a sop to wealthy shareholders rather than a productive use of corporate capital.

Based on a review of over 10,000 listed companies over 17 years (2004 to 2020), the paper finds that corporations use buybacks to increase liquidity and reduce volatility in their stocks, which helps to stabilize prices and reduce investor transaction costs.

“The resulting stabilization benefits all shareholders — including retail investors — regardless of whether they buy and sell stock in their own accounts or participate indirectly through investment in retirement accounts,” the paper said.

The paper estimated that retail investors saved between US$2.1 billion and US$4.3 billion as a result of the stabilizing effects of corporate buyback activity.

And it argued that efforts to curb buybacks by imposing limitations or taxes on corporate buybacks will ultimately hurt retail investors.

“Buybacks gives investors a return on their money allowing them to reinvest it in other companies,” said Tom Quaadman, executive vice-president of the CCMC.

“Capital that flows to shareholders is reinvested in innovative public and private companies of all sizes, including small businesses. Proposals that limit or restrict allocation of capital either through regulation or by tax policy will have a negative effect on our continued recovery from the pandemic and long-term growth.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.