DBAX 8006 Week 6 Buyback Counterargument Example

The Strongest Case Against My Claim About Buybacks: A Counterargument Section That States the Aggregate Objection at Full Strength, Concedes What It Proves and Shows Where It Stops Bearing on a Firm-Level Claim

Student Name

Walden University

DBAX 8006: Contemporary Challenges in Business

Instructor Name

Month Day, Year

The Strongest Case Against My Claim About Buybacks: A Counterargument Section That States the Aggregate Objection at Full Strength, Concedes What It Proves and Shows Where It Stops Bearing on a Firm-Level Claim

The Claim and the Objection

My claim is narrow: at firms that use share repurchases to meet analysts' earnings-per-share forecasts, buybacks have displaced investment and employment. The evidence comes from Almeida et al. (2016), who studied firms whose earnings per share would have fallen just short of analysts' forecasts without a repurchase. Comparing firms just below and just above the forecast, they found that firms likely to miss were much more likely to repurchase shares, and that those repurchases were followed by reductions in investment and employment. The design is strong because firms on either side of the forecast threshold are otherwise similar.

The strongest objection comes from a different level of analysis. Fried and Wang (2019) argued that concerns about buybacks starving the economy of investment rest on a misreading of aggregate data. Looking at public firms as a whole, they showed that while S&P 500 firms returned large sums to shareholders through buybacks and dividends, public firms also raised large amounts through share issuance, and that net shareholder payouts were much smaller than gross buybacks suggest. Investment across public firms remained substantial, and capital returned to shareholders is reinvested elsewhere in the economy, including in private firms.

What the Objection Proves

The objection proves a great deal, and I concede it. First, gross buyback totals overstate how much capital public firms remove from investment, because the same firms and others issue shares that bring capital back. Second, capital returned to shareholders does not disappear; it flows to other uses, which may be more productive than the repurchasing firm's own projects. Third, at the level of the whole economy, there is no strong evidence that buybacks have reduced total investment. Any claim that buybacks in general are starving the economy of investment is not supported, and I do not make it.

Where the Objection Stops

The objection stops at the boundary between the aggregate and the particular firm. My claim concerns a specific group of firms, those that repurchase to reach an earnings target, and asks what happened to their own investment. Fried and Wang's aggregate analysis cannot see that group. A reallocation of capital across the economy is compatible with harm at the firms that repurchase for the wrong reason, because the capital those firms gave up may have funded projects with positive value that they then abandoned. Almeida et al. (2016) found exactly that pattern at the threshold: firms cut investment they would otherwise have made.

The objection also does not address motive. Buybacks undertaken because a firm has no good projects are efficient; buybacks undertaken to hit a forecast while good projects are dropped are not. Aggregate data cannot distinguish the two, while the threshold design can, at least for firms near the forecast.

What My Claim Must Concede in Turn

Taking the objection seriously narrows my claim in two ways. First, I should not say that buybacks displace investment; I should say that repurchases motivated by earnings targets are associated with lower investment at the firms making them. Second, I should not imply that this harms the economy as a whole, since the capital is redeployed. The harm, where it exists, falls on the repurchasing firm's long-term prospects and possibly its employees, not on aggregate investment. Graham et al. (2005), surveying chief financial officers, reported that a majority of finance chiefs admitted they would pass on a profitable project rather than miss an earnings target, which suggests the behavior Almeida and colleagues measured is not rare among managers who feel that pressure.

Why This Objection and Not Others

Other objections were available. Some argue that buybacks are simply a tax-efficient form of dividend and so should be judged like dividends; others argue that executive pay tied to earnings per share, not buybacks themselves, is the real problem. Both are serious, but the aggregate capital-flows objection is the strongest because it challenges the premise that money leaving through buybacks is lost to investment. Answering it is what forces the claim down to the level where the evidence supports it.

Remaining Disagreement

The disagreement that remains is about magnitude. Almeida et al. (2016) measured effects for firms close to the forecast threshold, a relatively small group. How many firms outside that band behave similarly is unknown. Fried and Wang would likely say few; I think the survey evidence suggests more. That question cannot be settled with the evidence available this term, and the final paper should say so.

References

Almeida, H., Fos, V., & Kronlund, M. (2016). The real effects of share repurchases. Journal of Financial Economics, 119(1), 168-185. https://doi.org/10.1016/j.jfineco.2015.08.008

Fried, J. M., & Wang, C. C. Y. (2019). Short-termism and capital flows. Review of Corporate Finance Studies, 8(1), 207-233. https://doi.org/10.1093/rcfs/cfy011

Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002