AQR: Buyback Derangement Syndrome, 2018

Academic paper in The Journal of Portfolio Management, written by Cliff Adness, Todd Hazelkorn, and Scott Richardson of AQR.

Summary: “A seemingly large amount of stock buybacks in recent years has prompted many to claim that buybacks have come at the expense of new investment. Our latest paper shows why neither the theory nor the evidence supports this view.”

In the article “Buyback Derangement Syndrome,” AQR Capital Management addresses criticisms of corporate share repurchases, particularly the notion that funds used for buybacks could otherwise be invested in business activities that stimulate economic growth. The authors argue that this perspective oversimplifies the issue and does not align with financial economic principles.

Key Points:

• Misconception of Buybacks: The article challenges the view that each dollar spent on share repurchases is a dollar not invested in business activities that could drive economic growth. The authors suggest that this perspective fails to consider the broader financial context and the potential benefits of returning capital to shareholders.
• Agency Theory Considerations: The authors acknowledge that while some share repurchases may be driven by agency issues—such as management’s desire to boost stock prices ahead of anticipated stock option exercises—these instances are not representative of the broader corporate behavior. They emphasize that, in aggregate, share repurchase activity is less problematic than often portrayed.
• Economic Impact: The article contends that the true impact of share repurchases on the economy is complex and requires nuanced analysis. The authors argue that the prevailing narrative does not accurately reflect the multifaceted role of share repurchases in corporate finance.

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