New U.S. Chamber Study Shows Stock Buybacks Benefit All Shareholders

Tuesday, October 5, 2021 - 8:00am

Washington, D.C. -- The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) today released a new study detailing how stock buybacks benefit investors, reduce volatility, and promote efficient capital allocation.

The report, “Corporate Liquidity Provision and Share Repurchase Programs,” analyzes a broad sample of more than 10,000 U.S.-listed companies across a 17-year period (2004 to 2020) and finds that managers strategically utilize share repurchases to increase stock liquidity and reduce volatility, which in turn helps to stabilize stock prices. 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. 

“Fifty percent of Americans are invested in the stock market and stock buybacks, like dividends, are a critical means to distribute earnings,” said Tom Quaadman, Executive Vice President of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “Buybacks gives investors a return on their money allowing them to reinvest it in other companies. 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.”

The study identifies six key benefits of stock buybacks:                                                                                                    

Benefits retail investors: Stock buybacks generate significant economic benefits for retail investors, who account for more than 20% of trading volume in U.S. equities. Since 2004, the report estimates that buybacks have saved retail investors between $2.1 billion and $4.2 billion in transaction and price impact costs.  

Greater liquidity: Companies repurchasing stock provide substantial liquidity that facilitates orderly trading and reduces transaction costs for retail investors.

Reduced volatility: Stock buybacks significantly reduce realized and anticipated return volatility. Imposing limitations on buyback activity would increase stock market volatility and force retail investors to bear greater amounts of downside risk.

Proactive repurchase activity: Managers utilize market-based estimates of future volatility to inform their buyback decisions. When volatility is expected to be higher, managers increase their buyback intensity to stabilize stock prices, thus reducing costs for retail investors.

Mitigates uncertainty: Studies show that economic policy uncertainty increases stock price volatility and illiquidity. Managers respond to elevated policy uncertainty by strengthening their buyback activities. Retail investors benefit from price certainty about the value of their investments during periods of greater uncertainty.

Mitigates price pressures: Managers expand stock buyback activity during critical periods when investors sell relatively large amounts of shares. Thus, managers use buybacks to actively mitigate price pressure during periods of net selling pressure.

Read the full report here.