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Mind the buybacks, beware of the leverage

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  • Sirio Aramonte

Abstract

In the light of the economic toll of the Covid-19 pandemic, a natural question is whether the substantial amount of buybacks conducted in recent years has undermined corporate resilience and increased the need for public support. Buybacks are a means to distribute cash to shareholders. They are of concern for two reasons: first, managers could use them to artificially increase stock prices in order to boost performance pay; second, they could be a tool to raise leverage to excessive levels. There is some evidence that managers use buybacks opportunistically, but little indication of detrimental effects on long-term company value. However, buybacks appear instrumental in meeting leverage targets. Therefore, the main policy issue is leverage, and buybacks are of concern mostly in their role as leverage management tools.

Suggested Citation

  • Sirio Aramonte, 2020. "Mind the buybacks, beware of the leverage," BIS Quarterly Review, Bank for International Settlements, September.
    • Handle: RePEc:bis:bisqtr:2009d
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    References listed on IDEAS

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    Cited by:

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    4. Simon Schairer, 2024. "The contradictions of unconventional monetary policy as a post-2008 thwarting mechanism: financial dominance, shadow banking, and inequality," Review of Evolutionary Political Economy, Springer, vol. 5(1), pages 1-29, June.

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    More about this item

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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