End Stock Buybacks, Save the Economy?
One issue Im surprised never comes up in discussion of buybacks vs. dividends is, apart from the tax issue, whether buybacks drive stock prices up because of how large orders to buy stock at market price interact with the outstanding order book - ie that in a buyback you buy specifically from those of the current shareholders who attribute the lowest valuation to the stock at any given time. To simplify lets say 2 mutual funds each hold 50% of the stock of a corp. Mutual Fund A  values the stock (ie is willing to sell at) $100, and mutual fund B is willing to sell at $120. Other potential buyers value the stock at $99 or less. The company decides to buyback 50% of its stock. It buys all of A’s stock, and thereby drives the new market price to $120. Meaning it drives up the market price even before you consider the effect of reducing the # of outstanding shares (fewer shares &gt; higher EPS &gt; higher stock price at a given P&#x2F;E multiple). Of course, in the real world stockholding is less concentrated, the gap between valuations in the order book wouldn’t be so wide, shortsellers would also play a role and over time one would argue that efficient-markets-hypothesis factors in. But still... any thoughts?