The Effect of Buybacks on Capital Allocation

48 Pages Posted: 9 Jun 2022

See all articles by Ricardo De la O

Ricardo De la O

University of Southern California - Marshall School of Business

Date Written: March 3, 2022


This paper studies the macroeconomic effects of a 1982 SEC rule that made share buybacks a viable alternative to dividends for paying out funds to shareholders. I propose a quantitative model of heterogeneous firms with dividend adjustment costs and a manager-shareholder conflict, matched to micro data on US corporations’ cash flow statements. The flexibility of buybacks reduces capital misallocation. This is not only because investors can more easily shift resources to more productive firms, but also because stock prices become more responsive to productivity and thus help align incentives of managers and shareholders. This "stock price channel" allows the model to not only account for a decline in investment and increase in productivity, but also the increase in corporate cash holdings over the last decades.

Keywords: Payout Policy, Capital Reallocation, Investment, Cash Holding, Share Repurchases, Agency Frictions

JEL Classification: D21, E44, G35

Suggested Citation

De la O, Ricardo, The Effect of Buybacks on Capital Allocation (March 3, 2022). USC Marshall School of Business Research Paper Sponsored by iORB, Available at SSRN: or

Ricardo De la O (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 803
Los Angeles, CA California 90089-1424
United States

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