Skip to content

Jesse M. Fried & Charles C.Y. Wang, Are Buybacks Really Shortchanging Investment?, Harv. Bus. Rev., Mar.-Apr. 2018, at 88.

Abstract: Some experts argue that corporate leaders are starving their firms of investment capital by making excessive payouts to shareholders, thereby undermining innovation, employment opportunity, and economic growth. As evidence, they point to S&P 500 firms’ using 96% of their net income for repurchases and dividends. A closer look at the data shows that the amounts going to shareholders at the expense of internal investment are less than claimed. The problem lies in the ratio used—shareholder payouts as a percentage of net income—which fails to take into account offsetting equity issuances as well as actual R&D expenditures. The percentage of income potentially available for investment that goes to shareholders is not 96% but a much more modest 41%. After paying shareholders, S&P 500 firms are at near-peak levels of investment and have huge stockpiles of cash for exploiting future opportunities. There may well be severe corporate governance problems in the S&P 500, but the data suggests that excessive shareholder payouts is not one of them.