The Lost Opportunity in Buyback Spending
April 1, 2020
By Lenore Palladino
With the CARES Act corporate bailout underway, large corporations are once again being rescued by a hurting American public. No one doubts that stabilizing the economy and saving jobs as a first priority is absolutely critical. What’s also necessary is to understand what factors—besides the coronavirus—made large corporations so vulnerable in this moment.
One factor was the unprecedented use of stock buybacks in the 2010s to artificially elevate stock prices, at least for awhile. Publicly traded corporations spent $6.3 trillion dollars from 2010-2019 buying back their own stock on the open market—a practice which raises share prices for the shares that remain while contributing nothing to the actual productivity of the company’s business practices, goods, or services. This allows companies to legally manipulate the price of their own stock as corporate insiders simultaneously can sell their own shares in order to profit personally off of the bump in share value.
Unfortunately, stock buybacks remain under-regulated, even though they are temporarily banned for companies receiving bailout loans. As we face the potential for more and more industries requesting bailouts, it is useful to understand how sectors have spent their cash over the last decade. It will also be necessary to keep a very close eye on the actual mechanics of the bailout in order to ensure accountability to the restriction on shareholder payments and to ensure that federal funds are spent productively, rather than in service of executives and speculators.
The data available below is compiled from S&P Compustat, which aggregates the quarterly filings that publicly traded companies are required to make to the Securities and Exchange Commission (SEC). The stock buybacks data reported here are only for open-market share repurchases, not repurchases that are privately negotiated or conducted through tender offers. (My previous research investigated how corporate insiders are using stock buybacks for their personal gain.) Future research will examine which bailed-out company executives benefited most in the 2010s from this legal form of insider trading.
From the data, we can see that the Manufacturing, Information, and Finance and Insurance sectors all spent over $1 trillion over the decade on open-market share repurchases.
In terms of sub-sectors, Air Transportation spent $45 billion, while Hotels and Motels spent $38 billion; Rental and Leasing Companies spent $15 billion. It’s important to not get lost in the large dollar amounts but rather recall the lost opportunity to spend those funds on paid sick leave, rent forbearance, or retained earnings—all of which would have cushioned the blow of the current crisis. That is why ending open-market share repurchases is a necessary policy reform to ensure economic resiliency in the future.
First, we present data aggregated at the 2-digit Sector; next, we present data organized by the 3-digit Sub-Sector level. (See this Census page for more information on the NAICS.)
Download the 2-digit file here.