Robert Ayres and Michael Olenick, INSEAD
INSEAD WORKING PAPER
We advanced the null hypothesis that stock buybacks will have a positive impact on the market value of a business over a five-year horizon. We find that there is a negligible chance for this to be true (with a two tail heteroscedastic p=.000023).
We find that the more capital a business invests in buying its own stock, expressed as a ratio of capital invested in buybacks to current market capitalization, the less likely that company is to experience long-term growth in overall market value.
Our findings, for US firms worth more than $100 million, suggest that long-term investors, such as pension funds, should be wary of investing businesses that have engaged in significant cumulative stock repurchases (i.e. 50% or more of current market cap.)
We find that excessive buybacks in the past decades are a significant cause of secular stagnation, inasmuch as they effectively reduce corporate R&D while contributing, instead, to an asset bubble that creates no value.