Buyback Realities

Exchanges

Goldman Sachs

Business

4.4 • 1K Ratings

🗓️ 29 April 2019

⏱️ 18 minutes

🔗️ Recording | iTunes | RSS

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Summary

The surge in US corporate buybacks to all-time highs in 2018 has generated public debate about the effects of buybacks on workers, companies, and the economy. We speak with William Lazonick, prof. at the University of Massachusetts, about the concerns driving this debate, at the core of which is the notion that buybacks come at the expense of investment. But GS portfolio strategists see little evidence of this. Aswath Damodaran, prof. at the NYU Stern School of Business, argues that’s because buybacks redirect—rather than reduce—investment, and trapping cash in firms that don’t have a good use for it instead would harm their competitiveness. More broadly, Steven Davis, prof. at The Chicago Booth School of Business, explains that such an inefficient allocation of resources would shrink the size of the economic “pie” and likely reinforce the unequal distribution of it. As for market impacts, we conclude that banning buybacks would likely lead to lower and more volatile US equity markets. Learn more about your ad choices. Visit megaphone.fm/adchoices

Transcript

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0:00.0	From Goldman Sachs research, this is Allison Nathan.
0:05.0	Welcome to Top of Mind.
0:06.9	A podcast that explores macroeconomic issues on the minds of our clients.
0:19.9	The topic of this episode is buybacks, the practice of companies repurchasing their shares from the public markets.
0:26.6	In 2018, U.S. corporate buybacks hit an all-time high.
0:30.6	This sparked a heated public debate as Wall Street and Washington clashed over the use of corporate cash.
0:36.6	Take a look at today's New York Times because Senator Chuck Schumer and Bernie Sanders,
0:41.3	they wrote an opinion piece calling for limits on corporate stock buybacks.
0:45.3	Buybacks have been in Democrats' crosshairs for a while, but now a prominent Republican is jumping on the bandwagon as well.
0:52.3	Senator Marco Rubio is out with a new proposal today.
0:56.0	Many people have weighed in on the debate,
0:58.1	including Goldman Sachs' current and former CEOs.
1:01.1	Mr. Blankfine-frame buybacks is something that boosts the economy and jobs.
1:05.4	David, thank you so much for joining us.
1:07.1	Absolutely. Thank you for having me.
1:08.6	You know, companies are stewards of capital for their shareholders.
1:11.6	They need to invest in their businesses.
1:14.6	Now, for some perspective, buybacks have been on the rise for the past couple of decades,
1:19.6	but really took off last year after Congress passed the Tax Cuts and Jobs Act.
1:23.6	That legislation gave U.S. corporations an incentive to repatriate profits they'd been holding
1:29.2	overseas. So practically speaking, that translated into a surge in cash sitting on their balance sheets.
1:36.3	And this is where we get to the heart of the debate. Is Bonnebach shares the good use of this excess
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