Market Failure Of Corporate Buybacks Essay

Market Failure Of Corporate Buybacks Essay

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Market Failure in Corporate Buybacks

In recent years, American CEOs at S&P 500 corporations have taken up a particular practice—with startling consistency. Through the use of “corporate buybacks”, or purchasing outstanding shares of a company’s own stock, CEOs and their board members have artificially boosted share prices. This increases the value of the stock for shareholders, and particularly for those who conduct the practice, who often receive a large portion of their compensation in company stock. Yet, their gain comes at a cost: rather than investing back in their workers or services, firms have inflated stock prices with nothing more than hocus pocus. Research and development—a key component in driving innovation and long-term economic prosperity—comprises only 11 percent of cash expenditures of S&P 500 companies to date. Thus, in pursuing their own interests of indirectly boosting their compensation, executives have contributed to the stagnation of workers wages in real terms over the last thirty years. Now, separate from the general hysterics surrounding the explosion of CEO pay (we’ve all heard the statistics, CEOs in the 1980s made 40 times the median salary, today it’s 335), decrying the handful individuals earning these vast sums will be put aside in this argument. Instead, it’s perhaps more informative to view the corporate buyback issue through the lens of social costs: in pursuing their own interests, CEOs have enriched themselves at the enormous expensive of millions of Americans. Ultimately, this is more a market failure than a government one, and it necessitates action that realigns incentives and minimizes the wealth being drained from the engines that drive economic growth for all.
When organizing a solutio...


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...plex phenomena. Coase rightly argues that when transaction costs are low, individuals should be left to reach a mutually beneficial agreement. But that should only comprise the first step; if that does not get an efficient outcome, a third party enforcer is needed. Coase implies that when transaction costs are high, the government should step in. That is relatively compatible with Pigouvian solutions to transactions with social costs. And while the price system is a mechanism for communication, monopolization or perverse incentives may misconstrue prices. Passing along the most essential information is of critical importance; and indeed, separating the chatter from the signal is difficult. Hence, those in positions to look out from above and spot market imbalances ought to do so judiciously. Reworking incentives, or disincentives, proves the most reliable solution.

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