Two Sigma: Share Buybacks: A Brief Investigation, 2019

Two Sigma examines whether the rise in stock buybacks has artificially propped up equity prices, suppressed market volatility and weakened corporate balance sheets.

Summary:

The article “Share Buybacks: A Brief Investigation” by Two Sigma examines the impact of corporate stock buybacks in the U.S., addressing concerns that they artificially inflate equity prices, suppress market volatility, and weaken corporate balance sheets. The study analyzes nearly 25 years of U.S. stock buyback announcements and finds little evidence to support these claims.

Key Findings:

• Stock Performance and Buyback Announcements: Companies that announce buybacks often experience short-term stock price declines, which may prompt the buyback announcement. However, these companies generally exhibit stronger fundamentals and long-term stock performance that exceeds the market average.
• Market Volatility: The study finds no evidence that buybacks suppress market volatility. In fact, the data suggests that buybacks do not lead to a reduction in share price fluctuations.
• Corporate Balance Sheets: Companies announcing buybacks tend to have stronger-than-average fundamentals, including higher profits and cash flows, indicating that they have the capacity to return capital to shareholders without compromising financial stability.

In summary, the article concludes that the rise in stock buybacks does not support the concerns that they artificially inflate equity prices, suppress market volatility, or weaken corporate balance sheets. Instead, buybacks are associated with companies that have strong financial health and are returning capital to shareholders.