The Investment Effects of Legalizing Share Buybacks

Share buybacks have become one of the most contentious issues in corporate governance over the last decade in the U.S. and abroad. The volume of stock buybacks in the U.S. has increased dramatically, reaching a record $1.2 trillion in 2022; estimates suggest that 2025 may yet be the biggest year on record. 

Critics argue that public companies buying back their own stock are essentially eating themselves—choosing short-term stock price gains over valuable long-term investments in employees, research and development, and capital projects. This line of thinking was in part promulgated by economist Bill Lazonick’s influential HBR article, which showed that public firms in the S&P 500 regularly pay out more than 90% of their cumulative net income to their shareholders. These payout levels “left very little for investments in productive capabilities or higher incomes.” Stock buybacks, it would seem, are both a cause and a symptom of long-feared corporate short-termism.

Despite important conceptual and measurement flaws with Lazonick’s analyses, his worries about stock buybacks struck a chord with the public, including asset managers, corporate lawyers, and senior politicians. Indeed, stock buybacks became a rallying call among politicians to rein in corporate short-termism. Since 2018, politicians from both sides of the aisle have made various proposals to limit or ban (e.g., The Reward Work Act) open market share repurchases. Interest in regulating stock buybacks has also gained prominence. By 2020, the debate over stock buyback had become an international phenomenon, as regulators in the U.K. and the E.U. scrutinized their use and abuse in their respective markets. 

Despite the widespread concerns, empirical evidence on the impact of stock buybacks on corporate investments remains scant. Most existing studies focus on correlations within individual firms or specific scenarios, making it difficult to establish causality or understand market-wide effects. 

My new study with Elliot Tobin (Cornerstone Research), addresses this gap by examining what happened when 17 countries legalized share repurchases between 1985 and 2010. This staggered adoption provides a unique natural experiment to test whether allowing public companies to repurchase their own shares truly harms corporate investment—or whether the story is more complex than critics suggest. 

What We Found

When we looked at all public firms in these countries, we found that legalizing share repurchases led to an increase in overall corporate investment (CAPEX + R&D), by 8-10% on average. This headline result would seem to contradict the oft-touted belief that stock buybacks harm investment. 

Indeed, our findings also contradict a recently published paper in the Journal of Financial Economics, which also examines the impact of share repurchase legalization using the same international setting. However, this paper focused exclusively on firms that actually conducted buybacks shortly after legalization. These “repurchasers” represent only about 6.5% of public companies, which tend to be older, larger, hold more cash, have fewer growth opportunities, and more likely to pay dividends. When they buy back shares, yes, they tend to reduce their own investment. But that’s not necessarily bad, and that’s not the whole story. 

For example, if legalizing share repurchases help to facilitate access to equity capital—what we call the equity-capital access hypothesis—all public firms could stand to be impacted. And, from a regulator’s perspective, it is at least as important to understand how repurchase legalization impacts all public firms.

Testing the Equity-Capital Access Hypothesis

To see why overall investment rises once buybacks are allowed, we ran four diagnostics that an “easier equity funding” story must pass. Our results confirm. 

• Who invests? The investment bump comes from the 93% of firms that don’t engage in repurchases right after the law changes. These companies are typically younger, smaller, and cash-poor but rich in growth options. Meanwhile, repurchasers themselves trim CapEx, but the cash they release appears to be absorbed by other, more cash-needy firms. 
• How do firms fund those projects? Balance sheets tilt away from debt and toward equity, signaling a decline in the cost or accessibility of equity. 
• How do firms perform financially? ROA, ROE, sales growth, Tobin’s Q, and buy-and-hold returns all improve—signs that firms are better able to realize positive-NPV projects with easier access to equity capital. 
• Where is the investment effect stronger? The positive investment effect is stronger in markets where capital was harder to raise—countries with capital controls, cash hoarding, or fragmented equity markets—exactly where a new “equity spigot” should make the biggest difference.

Implications

Our results challenge the claim that open-market buybacks drain corporate investment. Yes, some mature repurchasers cut back on CapEx after repurchases became legal, but that marginal cut does not translate into a market-wide shortfall. In aggregate, legalization channels idle cash from low-growth, cash-rich firms to their high-growth, cash-poor counterparts, lifting total public-company investment. Confusing local and market-level effects risks costly policy error: a blanket ban on stock buybacks might prop up capital spending at roughly 7% of firms yet impede efficient capital allocation to the other 93%. For policymakers in the U.S. and elsewhere considering such sweeping restrictions, our study suggests caution: a blanket ban could inadvertently stifle efficient capital flow and harm the very growth and corporate investment they seek to foster.

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Charles C.Y. Wang is the Tandon Family Professor of Business Administration at Harvard Business School, and an ECGI Research Member.

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