Lenore Palladino, economics and public policy, testified in favor of a corporate stock buyback ban in front of the U.S. House Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets on Oct. 17. Palladino, a new member of the UMass faculty in 2019 and a fellow the Roosevelt Institute, spoke for five minutes and answered committee members questions during a hearing on “Examining Corporate Priorities: The Impact of Stock Buybacks on Workers, Communities, and Investors.”
“Stock buybacks are virtually unregulated, even though Congress has recognized their potential for market manipulation,” she said in her prepared remarks. “Stock buybacks have reached record volume: Corporations spent roughly $900 billion on them in 2018, and projections for 2019 are even higher. The volume of stock buybacks explains why more money has flowed out of our public capital markets than has flowed back in for the non-financial sector for years.”
“Companies are conducting stock buybacks in the midst of layoffs, calls by their workforce for an end to poverty wages, and clear alternate uses for corporate funds,” she said.
Palladino also raised the issue of executives potentially profiting off of buybacks prior to the wider market knowing about them.
“I argue there is another motivation for the high volume of stock buybacks: propping up stock prices for the benefit of short-term share sellers, which can include corporate executives,” she said.
“Importantly, there are no meaningful limits to stop executives from using corporate money on stock buybacks to raise share prices for their own short-term gain,” Palladino testified. “Executives are not required to disclose that they have conducted a buyback until the next quarter’s filing; meanwhile, there are no substantive limits to stop them from selling their own personal shares in the same quarter as they are conducting buybacks. This is why there is urgent need for new policies.”
Palladino recommended to the subcommittee “that Congress ban stock buybacks, or in the alternative, place low bright-line limits on their use.”
“A ban is the clearest mechanism to ensure fairness and investor confidence in our capital markets, by removing the ability of corporations to manipulate the price of their own stock,” she concluded. “At minimum, policy reforms must prohibit corporate insiders from selling their personal shares in the aftermath of a buyback before it is disclosed, and any buyback program should be immediately disclosed.”
The complete hearing can be viewed on the committee’s YouTube channel.