Many in politics and the media question the economic efficacy and ethical provenance of share repurchases, a ubiquitous corporate financial activity. Most recently, the federal government’s proposed 2022 budget disclosed their aims to curb repurchase activity with a one percent tax on all repurchases and to bar executives from selling shares for three years after a repurchase (see recent coverage by the New York Times). Our key question is whether evidence supports the critiques used to justify these and other anti-repurchase initiatives.

Our primary contribution is large-sample evidence on the trends and effects of share repurchases by US corporations. Specifically, we document trends in repurchases, and compare trading volume, share price performance, CEO pay, and corporate financial activities (e.g., investment and profitability) of firms in three groups: those that intensively repurchase shares, those that do so sparingly, and those that do not at all. We also provide a brief outline of the common economic rationale for and criticisms of share repurchases. However, our goal is not to rehash the numerous conceptual rationales in defense of share repurchases, nor argue that there are no cases when repurchases could be misused. Instead, we provide large-sample evidence on whether repurchases are systematically abusive, as suggested by some proponents of significant regulation.

There are several reasons why corporations might prefer using share repurchases instead of or in addition to dividends, including (i) maintaining flexibility in determining the amount of cash returned to shareholders, (ii) an ability to award repurchased shares to employees as equity compensation, (iii) a modest tax advantage to shareholders (that became less pronounced after the 2003 dividend tax cut), and (iv) the ability to send a credible signal of the firm’s (good) prospects.

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