There has been a rise in corporate stock buybacks (also known as share repurchases) over the past couple of decades, resulting in various assertions, including that:
- Share repurchases artificially prop up equity prices
- Share repurchases suppress stock-price volatility
- Share repurchases dangerously weaken corporate balance sheets
The Two Sigma Client Solutions Research team, the group that is also responsible for the research and methodologies applied in Venn, recently published “Share Buybacks: A Brief Investigation.” Their study uses nearly 10,000 buyback announcements in the U.S. over the past 20+ years to test the validity of these claims.
In summary, the authors did not find evidence that supports the aforementioned claims. In addition, they concluded that in the period studied:
- Buyback announcements were more likely for firms that had been performing well over the long term,1 but had suffered a recent price decline.
- Short-term stock-price volatility had little impact on whether a firm would buy back shares.
- Buyback announcements tended to provide some level of price support, but only recovered to pre-announcement sell-off levels (at least for buybacks in the post-Global Financial Crisis period),2 suggesting that buybacks on average do not appear to artificially prop up equity prices.
- The average level of idiosyncratic volatility was higher after the buyback announcement than before it.3
- Firms that repurchased shares tended to exhibit stronger fundamentals, larger market caps, lower leverage, and lower risk than the market on average.
1 Long-term is measured as the past one to three years.
2 Using the 6 months leading up to and following the buyback announcement.
3 Using the 12 months leading up to and following the buyback announcement.
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