Testimony of Jesse M. Fried on Stock Buybacks before the U.S. House of Representatives Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets

Abstract

This statement presents my views on buybacks and my general reactions to provisions in four pieces of legislation relating to stock buybacks.

Part I describes the role of stock buybacks in the economy and offers some “investor-benign” explanations for firms’ use of repurchases rather than dividends to distribute cash to investors. Part I then explains that the overall level of shareholder payouts (that is, the total amount of dividends and repurchases) does not appear to be too high; in fact, it may well be too low.

Part II describes the current regulation of buybacks, which I believe is too lax and enables their abuse by corporate executives. In particular, I will explain how current regulation can enable executives to use buybacks to enrich themselves at the expense of public investors, through (1) indirect insider trading, (2) the manipulation of the stock price and EPS metrics in compensation arrangements, and (3) “false signaling:” announcing repurchases that executives do not intend to carry out, solely to boost the stock price before executives unload shares.

Part III suggests a disclosure rule that would reduce executives’ ability to engage in the above-mentioned abuses, and therefore, better protect public investors: requiring public firms (like their insiders) to disclose trades in firm stock within two business days. I also describe additional measures that could be taken if this disclosure rule turns out be insufficient.

Part IV offers initial reactions to key provisions in these four pieces of legislation.

Keywords: repurchases, buybacks, equity issuances, investment, R&D, insider trading, manipulation, disclosure

JEL Classification: G14, G18, G32, G34, G35, K22