Mathias Kronlund is Assistant Professor of Finance at the University of Illinois at Urbana-Champaign. This post is based on an article authored by Professor Kronlund; Heitor Almeida, Professor of Finance at the University of Illinois at Urbana-Champaign; and Vyacheslav Fos, Assistant Professor of Finance at Boston College.
Companies face intense pressure from activist shareholders, institutional investors, the government, and the media to put their cash to good use. Existing evidence suggests that share repurchases are a good way for companies to return cash to investors, since cash-rich companies tend to generate large abnormal returns when announcing new repurchase programs. However, some observers argue that the cash that is spent on repurchase programs should instead be used to increase research and employment, and that the recent increase in share repurchases is undermining the recovery from the recent recession and hurting the economy’s long-term prospects. Repurchases have also been cited as an explanation for why the increase in corporate profitability in the years after the recession has not resulted in higher growth in employment, and overall economic prosperity.