Corporations use stock buybacks as a means to unlock value by returning surplus cash to investors. In turn, these investors can deploy the capital to more productive uses.
The popularity of stock buyback programs has attracted significant attention from academics, policymakers, and practitioners. Some vocal opponents conjecture that stock buybacks necessarily reduce investment and harm non-investor stakeholders such as employees. Although a large body of academic literature overwhelmingly refutes these claims, such vocal criticisms persist and have led some to calls for limits via taxing stock buybacks or outright bans on open market repurchases.
In this study, we present large sample evidence showing that stock buybacks have a beneficial but often overlooked effect on stock price stabilization. Using a broad sample of over 10,000 U.S.-listed companies across a 17-year sample period of 2004 to 2020, we present strong evidence that managers strategically utilize share repurchases to increase stock liquidity and reduce volatility. The resulting stabilization in stock prices benefits all investors—including retail investors, who now account for over 20% of trading volume in U.S. equities.