Corporate Buybacks Largest Buyer of Stock

Last month, Bloomberg highlighted the high level of company buybacks, noting that since the mid-2000s “corporations and investors have switched positions as the bigger buyer of stocks.” Specifically, “inflows from equity funds exceeded corporate buybacks every year in the late 1990s,” but corporate buybacks hit record levels in 2007 and have remained high. The article suggests that “the reluctance of investors to pile into equities has left corporate America the largest source of cash throughout the bull market,” drawing on an interview with Howard Silverblatt of S&P Dow Jones Indices.

“Last year, corporations beat all other groups as the biggest source of fresh cash to the stock market,” according to Goldman Sachs data. Richard Sichel of Philadelphia Trust Co. said, “these companies do this because they can,” observing “so many have tremendous amounts of cash historically and the investment rates on short-term cash are not too attractive.” While Sichel believes this is “good for the company and good for shareholders, Professor William Lazonick of the University of Massachusetts Lowell disagrees. As Bloomberg summarizes, he maintains that “they’re used to boost the per-share earnings in a way that enhances the pay of chief executives.” Lazonick said, “companies use a phony ideology saying that if you maximize your shareholder value you somehow increase the efficiency of the economy,” continuing: “but the only justification for doing it that holds water is that executives get a lot of their income from buybacks.”