Do Share Buybacks Suppress Corporate Innovation?

Abstract

Over the past two decades, U.S. firms have been repurchasing their shares on the open market at historic levels. Stock buybacks increase earnings per share, even in the wake of no earnings growth, driving up share price and benefitting the top executives who make these capital allocation decisions by increasing the value of their stock options. Pundits disagree on the impact that high levels of buybacks have on the economy, some arguing that stock buybacks come at the expense of strategic investment in innovation while others point to growth in private sector R&D in the past decade as evidence that firms have enough cash to innovate and repurchase shares simultaneously. In this paper, I empirically test whether share buybacks are suppressing corporate innovation in ways that control for the endogenous relationship between stock buybacks and innovation. I provide strong evidence that share buybacks are, indeed, suppressing corporate innovation. This has enormous ramifications to the long term viability of American industry and to social justice.