Corporate Liquidity Provision and Share Repurchase Programs

Craig M. Lewis is the Madison S. Wigginton Professor of Finance; and Joshua T. White is Assistant Professor of Finance, at Vanderbilt University Owen Graduate School of Management. This post is based on their U.S. Chamber of Commerce report. Related research from the Program on Corporate Governance includes 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).

Corporations use stock buybacks as a means to unlock value by returning surplus cash to investors. In turn, these investors can deploy the capital to more productive uses. The popularity of stock buyback programs has attracted significant attention from academics, policymakers, and practitioners. Some vocal opponents conjecture that stock buybacks necessarily reduce investment and harm non-investor stakeholders such as employees. Although a large body of academic literature overwhelmingly refutes these claims, such vocal criticisms persist and have led some to calls for limits via taxing stock buybacks or outright bans on open market repurchases.

In this study, we present large sample evidence showing that stock buybacks have a beneficial but often overlooked effect on stock price stabilization. Using a broad sample of over 10,000 U.S.-listed
companies across a 17-year sample period of 2004 to 2020, we present strong evidence that managers strategically utilize share repurchases to increase stock liquidity and reduce volatility. The resulting stabilization in stock prices benefits all investors—including retail investors, who now account of over 20% of trading volume in U.S. equities.

Our analyses of stock buybacks have six key takeaways:

  • Greater Liquidity: Companies repurchasing stock provides substantial liquidity that facilitates orderly trading and reduces transaction costs for retail investors.
  • Reduced Volatility: Stock buybacks significantly reduce realized and anticipated return volatility. Imposing limitations on buyback activity would increase stock market volatility and force retail investors to bear greater amounts of downside risk.
  • Retail Investors Benefit: Stock buybacks generate an economically large benefit for retail investors. Since 2004, buybacks have saved retail investors $2.1–4.2 billion in transaction and price impact costs.
  • Proactive Repurchase Activity: Managers utilize market-based estimates of future volatility to inform their buyback decisions. When volatility is expected to be higher, managers increase their buyback intensity to stabilize stock prices, thus reducing costs for retail investors.
  • Response To Uncertainty: Studies show that economic policy uncertainty increases stock price volatility and illiquidity. Managers respond to elevated policy uncertainty by strengthening their buyback activities. Retail investors benefit from price certainty about the value of their investments during periods of greater uncertainty.
  • Strategic Liquidity Supplier: Managers expand stock buyback activity during critical periods when investors sell relatively large amounts of shares. Thus, managers use buybacks to actively mitigate price pressure during periods of net selling pressure.

Overall, our analyses demonstrate the beneficial impact of stock buybacks on stock liquidity and volatility. To appreciate the market stabilization benefit of buybacks, it is important to understand what stock liquidity and volatility represent. A stock is considered to be liquid if buyers and sellers can transact quickly with low price impact. Highly liquid stocks also have more stable prices and thus lower stock price volatility. Our study shows that stock buybacks enhance liquidity and lower volatility. This allows all investors—institutional and retail—to buy and sell without having a large price impact.

Stock liquidity is especially beneficial to investors during periods of greater uncertainty when, for example, some institutional investors (e.g., index funds) must transact in stocks due to fund flows in and out of their portfolio. Retail investors also benefit from more stable stock prices as it allows them to sell stocks closer to the intrinsic value even during periods of higher uncertainty. By providing price support during periods when selling pressure is relatively high, buybacks benefit investors by reducing the downside risk of their investment.

Much of the rhetoric that surrounds the current debate on stock buybacks focuses on perceived advantages conferred to wealthy shareholders. For example, U.S. Sen. Sherrod Brown, the current chair of the Senate Committee on Banking, Housing and Urban Affairs, recently commented, “Today, much of that capital is funneled back to wealthy executives in the form of stock buybacks—which used to be illegal market manipulation—and only about 15 percent goes to the real economy.” [1]

Contrary to the “political” view that share repurchase programs are self-serving mechanisms for inflating executive compensation, the evidence introduced by our study overwhelmingly supports the notion that managers use stock buybacks as a market stabilizing force, especially during uncertain and volatile periods. Price stabilization is a benefit that is conferred to all shareholders, including retail investors, regardless of whether they buy and sell stock in their own accounts or participate indirectly through investment in retirement accounts. We quantify the liquidity and volatility benefits of buybacks and estimate that retail investors save $2.1–4.3 billion during our full sample period. These benefits equate to $126–253 million in retail investor savings per year.

Therefore, our results have important policy implications for the contemporaneous discussions on buyback activity. Based on our findings, imposing any limitations or taxes on corporate share repurchases will curb managers’ ability to supply liquidity and reduce volatility during crucial periods of uncertainty, which would ultimately harm retail investors by forcing them to incur additional transaction costs and bear greater downside risk.

The complete publication, including footnotes, is available here.


1See “Brown, Wyden unveil major new legislation to tax stock buybacks,” September 10, 2021, available at Sen. Brown’s comment ignores the fact that the funds directed to stock buybacks are reallocated within the economy, likely to companies that are better able to put the money to use in profitable opportunities that create even more jobs (see, e.g., Fried and Wang, 2018).(go back)

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