Research paper from O’Shaughnessy Asset Management.
Summary: This paper offers an examination of stocks with strong buybacks, trying to determine if they are thriving because of earnings or stock manipulation.
In “Buybacks, Bears, and Bulls,” O’Shaughnessy Asset Management examines the debate over corporate share repurchases. Critics argue that buybacks are a form of financial engineering, used by managers to inflate earnings per share (EPS) and stock prices, often to meet analyst expectations or benefit from stock-based compensation.
The paper explores the mechanics of stock repurchase plans, highlighting that while some companies may manipulate earnings through buybacks, the overall impact on EPS is often minimal. For instance, a company repurchasing 5% of its shares in a quarter with modest earnings per share would see only a slight increase in EPS, suggesting that the effect of buybacks on EPS is limited.
The paper also notes that companies with low EPS have a more significant challenge in moving the needle on EPS through buybacks, as substantial repurchases are needed to achieve even a small increase. Overall, the article provides a nuanced view of the role of buybacks in corporate finance, acknowledging both the potential for manipulation and the limited impact on EPS in many cases.
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