The Bright Side of Stock Repurchases

Abstract

Motivated by concerns that stock buybacks slow down the economic recovery in the United States, I analyze the bright side of open market repurchases. I examine the effect of price-support motivated repurchases on Capital Expenditures, Research & Development, and Corporate Acquisitions. I exploit the fact that distressed mutual funds tend to decrease existing positions to meet redemptions, and that these sales are uncorrelated with the firms' prospects. I show that price-support motivated repurchases increase corporate investment, specially in Capital Expenditures. Firms that trade their own stock to support price reduce the cost of capital, easing financial constraints, what ultimately leads to an increase in investment. Contrary to the widespread belief that repurchases trade off investment, these results suggest that some repurchases have positive real effects.