Why are stock buybacks so controversial?


Why are stock buybacks so controversial?

In: Economics

Here’s my answer, just know I don’t know what I’m talking about. A company gets some bailout money, and they use that to buy their own stocks instead of paying bills/employees etc. Then when their stocks go up they make lots o money.

It becomes controversial when a company spends excess profits on stock buyback to benefit their shareholders and execs, then those same companies cry they don’t have any money and demand government bailouts.

The money used on buybacks could have been saved and invested.

Stock buybacks only benefit a small number of people, and the CEO often stands to benefit the most.

It would probably be better for society as a whole to spend that money on better wages for workers.

They artificially inflate the value of the company’s stock, usually per share (which in turn might increase bonus possibilities for executives- their incentives are to increase per share cost, without much regard to actually adding substantive value to their company).

When companies have extra cash laying around they can choose to spend it on more equipment, better wages, product research, etc. Or they can purchase their own stock.

If they purchase their own stock it will increase the price of that stock (generally when more people want to buy a thing, price goes up). This helps people who own stock in that company because the value went up.

It’s controversial because that money is seen as being selfishly spent on “pumping the numbers”and increasing stock prices. This matters because the CEO both owns stock and is often paid based on stock price. So it is seen as selfish.

That money could have also been spent on other things like wages, etc.

There’s a balance between having too much money, thereby eroding shareholder value (Google is particularly guilty of this), and having too little cash to help get you through the bad times. Stock buybacks are all about returning value to shareholders, at the expense of cash on hand.

Stock buybacks aren’t inherently a bad thing, but if you do it too much, you can be in big trouble if things go negatively quickly.

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