In July 2019, the UK government’s department for Business, Energy, and Industrial Strategy published a study on the effect of share buybacks on executive pay and investment which they asked PwC and me to conduct. The full report is here and a simple summary is here.
We found no evidence that share buybacks were being systematically used to inflate executive pay. Over the 2007-17 period we studied, not a single FTSE 350 firm successfully used share buybacks to meet an EPS target. Specifically, there was no firm that ended up above its EPS target that would have been below had it not repurchased shares. Moreover, firms that ended up above their EPS target bought back fewer shares than those that ended up below – inconsistent with concerns that they hit the target through buybacks.
Similarly, we found no evidence that buybacks crowd out investment. There was no correlation between share repurchases and investment. Furthermore, companies that would have missed an EPS target without a buyback (and thus had particularly strong incentives to cut investment to fund a buyback and hit the target) didn’t invest less than other firms without such incentives.
These findings are consistent with Chapter 7 of the book, which suggests that share buybacks generally do create long-term value, in contrast to common concerns. However, the study did not argue that everything is rosy. We found that firms with EPS targets in their bonus contracts invest less than firms without. Thus, it may be pay structures, rather than buybacks, that are the cause of any underinvestment in the UK. While this result is consistent with Chapter 5, which highlights how bonus targets can lead to short-termism, it’s only a correlation. Further research is needed to study whether bonus targets have a causal impact on investment in the UK.