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.

Read more of their research here, and subscribe to directly receive the latest research from Two Sigma, for the topics you choose, in your inbox.

 

REFERENCES

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.

 

This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed.  The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment.  This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time.  Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.

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