Whether that’s true -- and a lot of people disagree -- has big implications should buybacks go extinct.
A major salvo in the war over repurchases came in a 2017 paper by AQR Capital Management. It found no reason to assume buybacks drove the bull market. Evidence that they result in companies investing less in their businesses is scant, and because they’re often financed by debt, repurchases didn’t use up capital, said the authors, who include billionaire hedge fund manager Cliff Asness. The paper cited academic evidence showing that the announcement of a repurchase drives the associated stock up 1% or 2% on average—not an enormous effect, and one that may be explained in part by the vote of confidence in the company’s future that a buyback signals.
“There’s so many things that go into supply and demand for stocks, and what makes stocks attractive for investors, that viewing buybacks in isolation would miss a lot of the intrinsic value,” says Ed Clissold, chief U.S. strategist at Ned Davis Research. Eliminating buybacks “would make a difference. It would decrease demand for stocks. But if companies are growing earnings and are attractively valued, then there should be plenty demand for stocks.”
This article was provided by Bloomberg News.