Who Benefits from Stock Buybacks?

In 2007 U.S. companies spent $1 trillion on stock buybacks that exceeded dividends paid and accounted for two-thirds of net income. Since 2000 those same companies distributed $3 trillion to shareholders through buybacks.

“By any measure, these amounts are staggering and evidence a substantial distribution of cash to shareholders that might otherwise be put to other uses—like jobs,” said UC Davis Professor Paul A. Griffin, whose recent paper with Professor Ning Zhu, “Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence,” was published in the June issue of the Journal of Contemporary Accounting & Economics.

When a company buys back its own stock, it removes stock from the market, increasing earnings per share and, hopefully, stock price. Buybacks are intended to benefit all shareholders, but Griffin and Zhu found that weak governance and unclear accounting allow companies to tilt the playing field in favor of their executives, who receive additional compensation because the buyback makes their stock options more valuable. 

“This aspect of compensation has been sky-rocketing in recent years,” explained Griffin. “Few people are aware that buybacks are being used to enhance CEO compensation.”

Griffin and Zhu also discovered a positive relation between CEO insider selling following a buyback and the number of shares repurchased.