Mind the buybacks, beware of the leverage

Sirio Aramonte

BIS Quarterly Review, 2020

Abstract: In the light of the economic toll of the Covid-19 pandemic, a natural question is whether the substantial amount of buybacks conducted in recent years has undermined corporate resilience and increased the need for public support. Buybacks are a means to distribute cash to shareholders. They are of concern for two reasons: first, managers could use them to artificially increase stock prices in order to boost performance pay; second, they could be a tool to raise leverage to excessive levels. There is some evidence that managers use buybacks opportunistically, but little indication of detrimental effects on long-term company value. However, buybacks appear instrumental in meeting leverage targets. Therefore, the main policy issue is leverage, and buybacks are of concern mostly in their role as leverage management tools.

JEL-codes: G33 G35 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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