Eight days later, Ronald Reagan was elected president, and two years later the new majority he appointed to the SEC, led by Chairman John Shad, a former head of investment banking at E.F. Hutton, swept all this aside. The commission instead granted “safe harbor” from liability for most repurchases, arguing that “issuer repurchase programs are seldom undertaken with improper intent” and “may frequently be of substantial economic benefit to investors.” The new rule still contained limitations on buybacks—the safe harbor disappeared during mergers, for example, and you couldn’t do any buybacks during the last half-hour of a trading day — but the disclosure requirements were so lax that it would be hard to tell if a company were violating them (these were beefed up somewhat in 2003). Buybacks had been unleashed.

They were also starting to become fashionable, thanks to an electrical-engineer-turned-corporate-executive named Henry Singleton. During the stock market go-go years of the 1960s, Singleton had built a small electronics company into a sprawling but well-managed conglomerate. Stock in his Teledyne Corp. seemed to him to be priced quite richly relative to his preferred metric of profit, free cash flow, so he kept issuing more and more of it to buy other companies—130 of them from 1961 to 1969 (Of the 130 acquisitions, 128 were done using only stock). When the stock market slumped after that, and the conglomerate Singleton had assembled kept churning out cash, he decided to stop issuing stock and start retiring it. “I think we can earn a better return buying our shares at these levels than by doing almost anything else,” he told one of Teledyne’s board members, the venture capitalist Arthur Rock, in 1972. “I’d like to announce a tender—what do you think?”

A tender is a public offer to buy a certain amount of shares at a set price, a transaction transparent enough to avoid any SEC suspicions of market manipulation. Rock and the rest of the board agreed to Singleton’s plan, and “between 1972 and 1984, in eight separate tender offers, he bought back an astonishing 90 percent of Teledyne’s outstanding shares,” wrote private equity investor Will Thorndike in “The Outsiders,” the 2012 book from which my account of Singleton here is taken. “Singleton bought extremely well, generating an incredible 42 percent compound annual return for Teledyne’s shareholders across the tenders.”

Those who sold in the tender offers didn’t share in those returns, of course, but they did get cash, on which they paid tax at capital-gains rates rather than the higher tax rates to which dividends—traditionally the chief means of conveying excess corporate cash to shareholders—were subjected. Other financially savvy corporate managers began to follow Teledyne’s example, with Warren Buffett endorsing buybacks in his 1978 Berkshire Hathaway shareholder letter as “often by far the most attractive option for capital utilization.” By 1985, Buffett’s friend and bridge partner Carol Loomis was reporting in Fortune that corporations that voluntarily bought significant amounts of their own common stock from 1974 through 1983 had as a group outperformed the Standard & Poor’s 500 Index by 8.5 percentage points a year. And buying back shares had, thanks to the SEC, just become a lot easier to do.

In the 1980s, a lot of the net share purchases apparent in the above chart were due to leveraged buyouts and mergers that removed shares from circulation. Others were opportunistic buybacks of the sort pioneered by Singleton, with repurchases spiking in the months after the 1987 stock market crash as executives bet correctly that markets would recover. In the 1990s, though, buybacks began to be something that companies just did, year in, year out. Their apparent success as a means of delivering higher shareholder returns—several studies in the 1990s backed up Loomis’s early findings—was one reason, but in her 1995 Massachusetts Institute of Technology doctoral dissertation, economist Christine Jolls proposed another. As she wrote in a subsequent paper:

The increased use of repurchases coincided with an increasing reliance on stock options to compensate top managers, and stock options encourage managers to choose repurchases over conventional dividend payments because repurchases, unlike dividends, do not dilute the per-share value of the stock. Consistent with the stock option hypothesis, I find that firms that rely heavily on stock-option-based compensation are significantly more likely to repurchase their stock than firms which rely less heavily on stock options to compensate their top executives.

Companies were giving out more and more stock options to their executives as compensation, and using buybacks to keep those grants from inflating shares outstanding, which would dilute earnings per share and thus presumably put downward pressure on stock prices. It wasn’t exactly what the SEC had in mind back in 1980 when it said buybacks were fraudulent if used to “assist insiders in disposing of their holdings,” but it was kinda-sorta in the ballpark. In recent years, corporate insiders have been twice as likely to sell stock in the eight days after their company announces a buyback as at other times, SEC Commissioner Robert Jackson reported in 2018. That sure seems like a hint that companies are often buying back shares for reasons other than that management truly believes it is “the most attractive option for capital utilization.”

In keeping with this impression, some recent studies show the shareholder-return advantage once enjoyed by buyback companies to have largely evaporated. This is partly just because buybacks are so widespread that it would be really hard for buyback companies to beat the average, given that they now more or less are the average. There is some evidence, though, that a predilection for buybacks may now foreshadow trouble ahead. Buybacks go hand in hand with decreased capital investment (although there are questions about the direction of causation), while the banks that spent the most on buybacks in the run-up to the 2008 financial crisis were the most likely to need bailouts during it. Plus, the simple fact that buybacks hit their all-time high as a share of GDP in mid-2007, right as things began to unravel, is pretty damning on its own. I’m still not quite ready to buy into University of Massachusetts at Lowell economist William Lazonick’s increasingly influential argument that buybacks, and the SEC’s 1982 rule change in particular, are responsible for pretty much everything bad that’s happened to the U.S. economy since.1 But I can’t entirely dismiss it either.

The role of buybacks in the coronavirus-induced crisis does seem somewhat secondary. Yes, it looks terrible that the five biggest U.S. airlines spent 96% of their free cash flow on buybacks from 2010 through 2019, as Bloomberg’s Brandon Kochkodin reported in March. Buybacks didn’t cause the pandemic, though, and I’m not sure we really ought to expect corporations to have balance sheets that can withstand the consequences of having their industry virtually shut down worldwide for months. Banning buybacks until government aid is repaid does make sense, as does banning common-stock dividends for that period — which the legislation also does. That doesn’t mean either should be banned forever, although I guess it does indicate that one or the other conceivably could be.