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  • Harvard Business Review

Are Buybacks Really Shortchanging Investment?

By: Jesse M. Fried and Charles C.Y. Wang
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Abstract

It’s no secret that the American economy is suffering from the twin ills of slow growth and rising income inequality. Many lay the blame at the doors of America’s largest public corporations. The charge? These firms prefer to distribute cash generated from their businesses to shareholders through stock buybacks and dividends rather than invest for the long term, undermining job growth and putting the country’s economic future at risk, often pointing to the high ratio of shareholder payouts to net income. These claims are at odds with corporate leaders' statements about their commitment to long-term success. To understand the disconnect, we examine how S&P500 companies are actually allocating capital and show that firms are in fact plowing substantial amounts of capital into R&D and CAPEX. Moreover, we explain that the ratio of dividends and stock repurchases to net income is misleading and ignores two important factors: first, focusing on dividends and buybacks ignores the substantial (direct and indirect) equity issuances firms engage in; second, net income is a poor metric of income potentially available for investment. Taking these factors into account, we show that the data does not support the view that excessive payouts are draining corporations of investment capacity.

Keywords

Economy; Investment; Stocks; Business and Shareholder Relations; Equality and Inequality; United States

Citation

Fried, Jesse M., and Charles C.Y. Wang. "Are Buybacks Really Shortchanging Investment?" Harvard Business Review 96, no. 2 (March–April 2018): 88–95.
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About The Author

Charles C.Y. Wang

Accounting and Management
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More from the Authors

    • August 10, 2022
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    The Virtues of Stock Buybacks

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    How Much Should We Trust Staggered Difference-In-Differences Estimates?

    By: Andrew C. Baker, David F. Larcker and Charles C.Y. Wang
    • March 2022
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    Corporate Governance in Business Analysis and Valuation

    By: Charles C.Y. Wang
More from the Authors
  • The Virtues of Stock Buybacks By: Jesse M. Fried and Charles C.Y. Wang
  • How Much Should We Trust Staggered Difference-In-Differences Estimates? By: Andrew C. Baker, David F. Larcker and Charles C.Y. Wang
  • Corporate Governance in Business Analysis and Valuation By: Charles C.Y. Wang
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