Short-Term and Long-Term Shareholders: Allies or Foes? Evidence from Share Repurchases

Abstract

Theoretical literature offers competing views on the severity of conflicts between short- and long-term shareholders, conflicts that have also motivated recent criticism of share repurchases. We investigate whether share repurchases are associated with inefficient underinvestment in the presence of short-horizon investors. In a sample of U.S firms over the 1988-2018 period, we find no evidence that short-term ownership and buybacks are associated with cuts to capital or labor investments. Instead, share repurchases reduce inefficient overinvestment related to corporate short-termism. We use Russell Indexes reconstitutions to address endogeneity. Contrary to popular belief, share repurchases do not have detrimental effects for long-term investments.

Keywords: Stock Repurchase, buybacks. Investment Horizon, Investment Efficiency, Employment, Institutional Investor

JEL Classification: G35,G32,