Many politicians believe that corporate share buybacks create “perverse” incentives for firms to prioritize short-term investments over future ones. The 2022 Inflation Reduction Act included a 1 percent tax on all buybacks, and President Trump recently issued an executive order to prohibit share buybacks for underperforming defense contractors.
Recent research, however, shows that
legalizing share repurchases increased investment by 8.0–9.8 percent among public firms … [and] improved public companies’ access to equity capital.
Moreover, the firms receiving these investments
tended to be younger, smaller, and higher-growth, and typically held less cash … suggest[ing] that legalizing share repurchases allowed capital to flow from cash-rich, mature firms to cash-needy firms with greater growth opportunities.
These results make sense: Shifting cash from firms that do not have immediate productive uses to firms that do is good for economic efficiency. Inhibiting this shift stifles corporate investment and growth.
Cross-posted from Substack.