The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu The leading online blog in the fields of corporate governance and financial regulation. Fri, 05 Jun 2026 11:32:03 +0000 en-US hourly 1 https://wordpress.org/?v=6.5.8 https://corpgov.law.harvard.edu/wp-content/uploads/2024/02/cropped-photography-4-e1706898544564-1-32x32.png Do Share Buybacks Really Destroy Long-Term Value? – The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu 32 32 Do Share Buybacks Really Destroy Long-Term Value? https://corpgov.law.harvard.edu/2020/10/22/do-share-buybacks-really-destroy-long-term-value/?utm_source=rss&utm_medium=rss&utm_campaign=do-share-buybacks-really-destroy-long-term-value https://corpgov.law.harvard.edu/2020/10/22/do-share-buybacks-really-destroy-long-term-value/#comments Thu, 22 Oct 2020 12:59:50 +0000 https://corpgov.law.harvard.edu/?p=133835?d=20201022085950EDT Posted by Alex Edmans (London Business School), on Thursday, October 22, 2020
Editor's Note:

Alex Edmans is professor of finance at London Business School. This post is based on his recently published book Grow the Pie. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here); and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, by Jesse Fried (discussed on the Forum here).

Share buybacks are one of the most controversial corporate decisions today. US Senator Elizabeth Warren claimed that “buybacks create a sugar high for the corporations. It boosts prices in the short run, but the real way to boost the value of a corporation is to invest in the future, and they are not doing that.”

That quote highlights the two main reasons why share repurchases are unpopular. First, they prevent investment—in wages, in new and better products, and in reducing carbon emissions. They seem to split the pie in favour of investors and at the expense of wider society. Second, they increase the short-term stock price, allowing a CEO to benefit by opportunistically cashing out her shares. Moreover, the CEO’s personal incentives to undertake repurchases are even broader than in Senator Warren’s quote. Buybacks increase not just the stock price but also a company’s earnings per share (EPS). That allows a CEO to hit any EPS target in her bonus contract—without boosting revenues or cutting costs, which were presumably the actions that the EPS target hoped to encourage.

(more…)

]]> https://corpgov.law.harvard.edu/2020/10/22/do-share-buybacks-really-destroy-long-term-value/feed/ 4