A year ago, the GameStop stock fiasco brought the term “market manipulation” into the public consciousness. It’s time to be aware of another, hotly debated form of market manipulation- stock buybacks, when a company buys its own stock. Companies do so in order to reduce the supply of their stock while temporarily increasing the demand for it, thus increasing the price. But a buyback campaign often costs billions, and a huge portion of company revenue. Why would companies do this, why is it legal, and what are the effects?
The SEC describes market manipulation as “intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities, or intentional interference with the free forces of supply and demand.” Some examples of market manipulation would be a pump-and-dump scheme, in which fraudsters lie about the value of stock in order to cause an artificial temporary increase in its value, at which point they sell off their shares. Another example would be wash trading, in which scammers algorithmically buy and sell one stock very quickly to increase its trading volume and make it appear to be a popular stock. There are many more forms of market manipulation, and the purpose of the SEC is to prevent it.
Then, you may be asking, shouldn’t the SEC ban stock buybacks? They’re clearly an artificial interference with stock supply, they increase the value of the stock without increasing the real value of the company, and the idea of a company’s board buying its own stock sounds suspicious by common sense. The SEC did ban stock buybacks, with the official position that they were a form of market manipulation, until they legalized buybacks under the Reagan administration in 1982. Reagan argued that stock buybacks were a way for companies to return their profits to investors, similar to dividends. In practice, they’re closer to an extremely expensive way for executives to increase the value of the stock they hold in their company. Since a buyback campaign results in more money in executive’s pockets, corporate America has become increasingly addicted to them.
There are a number of moral issues with stock buybacks, some more obvious than others. The obvious issue is the sheer amount of money companies spend on it, which was just over $850 billion in 2021 among S&P 500 companies alone. That’s greater than the US military’s annual budget. A buyback campaign is an undeniable indicator that a company is making extranormal profits. Many of the same companies underinvest in research or worker pay, claiming that they don’t have the money, while pumping billions into inflating their share prices. There’s no kind way to put this: any company engaging in a buyback campaign that also claims it can’t afford to increase the pay of its employees is lying.
The long-term negative effects of buybacks may be even worse. In an ideal system of American capitalism (that phrase does a lot of work, but stick with it for the moment), corporate profits are all reinvested in forms of economic development that benefit the people of the country as a whole. Mainly, these profits ideally go into research, human resources, and infrastructure investments, which increase the value of the economy and the standard of living over time. Whether that was ever true is up for debate, but reinvestment in innovation and job creation is simply not happening. There has been a structural change in how, or even if, businesses create value for the country, and while stock buybacks aren’t the cause of all of it, they’re a large portion of it. When companies pump more money than the military budget into stock market manipulation rather than creating the value that leads to future prosperity, something is very wrong. The long-term fuel of American prosperity is being thrown into a financial pit for short-term executive gains.
There are many, more complex, problems caused by buybacks becoming a central goal of today’s corporations. The borrowing used to finance them causes a house-of-cards type of financial toxicity that could exacerbate the next financial crisis. Companies may lie about their reasons for price increases in order to fund more buybacks. Sometimes buybacks don’t even increase the price for all shareholders, instead offsetting dilution effects from when executives are paid in stock. They contribute to the wage-productivity gap. They move money that should be wages to wealthy stockholders, exacerbating inequality. President Biden recently announced a weak proposal to discourage, but not ban, stock buybacks as part of his 2023 budget. A better choice would be to push the SEC to revoke Rule 10b-18 and ban this destructive form of market manipulation.
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