The complex debate over share buybacks

The rise in corporate earnings in the recent period has enabled a sharp rise in share buybacks. This increase in share buybacks has been heavily criticised. There are two reasons for this criticism: Share buybacks (an increase in shareholder remuneration) take place at the expense of employee remuneration; Share buybacks take place at the expense of corporate investment. Overall, for the OECD as a whole, the first argument is correct, as income distribution has skewed against wage earners quite strongly in the recent period. The second argument is up for debate. If a company that does not have an efficient investment project buys back its shares, it returns money to its shareholders, who may then in theory finance efficient investment projects. Unfortunately, share buybacks have coincided with a decline in capital accumulation and in productivity gains and with a rise in share prices: share buybacks have probably been used more to buy existing shares than to finance new investments.