Will Republicans Learn Anything from Tuesday? Watch the NDAA Buyback Ban

Norbert J. Michel

Many people are viewing Tuesday’s election results as a rejection of the administration’s policies, a view that’s hard to argue with. Still, whether the Republican Party quickly moves away—or moves at all—from the populist policies that appear to have brought electoral ruin remains an open question. 

One small litmus test that’s quickly coming up is a ban on stock buybacks that a group of populist senators squeezed into the “must-pass” National Defense Authorization Act (NDAA). Members of the House were able to keep it out of their version of the NDAA, but the legislation is moving, and the two chambers will soon have to reconcile (possibly by Thanksgiving). 

So Americans are about to find out whether Republican senators really view the election results as a repudiation. If the buyback provision stays in the Senate’s NDAA, it’s a good sign that members are not broadly listening to the electorate. 

For a quick recap on the stock buyback ban issue: 

In January President Trump issued an executive order restricting stock buybacks and dividend payments for defense contractors. Trump paired the announcement with the endlessly recycled rant that companies were paying dividends and buying back their own shares at the expense of investing in physical assets and creating jobs. Then, in July, Senators Elizabeth Warren (D‑MA), Josh Hawley (R‑MO), and Mike Lee (R‑UT) made similar claims and added their provision to the NDAA. 

Fast forward to October, and a group of labor unions, led by the United Auto Workers (UAW), started circulating a letter supporting a ban on buybacks and dividends for defense contractors. According to UAW president Shawn Fain, “It’s time we put an end to defense contractors paying off Wall Street while defense workers and taxpayers pay the price.” 

Setting aside who these companies’ shareholders might be and the potential implications for companies in other industries, this policy is harmful because it will allow the federal government to start dictating a group of companies’ capital-structure decisions. That’s bad enough for a party that supposedly rejects socialism, but if the Senate leaves this provision in the NDAA, it will be making this policy blunder based on a long list of falsehoods.

Back in 2023, populist groups started promoting the idea that stock buybacks were illegal until the Securities and Exchange Commission (SEC) promulgated a new rule in 1982. Supposedly, the new rule provided companies with safe harbor from insider trading prohibitions, and then they started a frenzy of buybacks. 

But that idea was as wrong as could be. 

Stock buybacks were not illegal prior to 1982, and the new SEC rule did not provide a safe harbor from insider trading prohibitions. In fact, the final rule explains that share buybacks had been the subject of several prior rule proposals dating back to 1967, and it explicitly states that it does not provide an insider trading safe harbor.

The rule originated because, as capital markets grew (along with Americans’ wealth), companies were increasingly accused of manipulating their share prices. They feared they would run afoul of the Securities Exchange Act of 1934’s anti-manipulation provisions, so they petitioned the SEC for clarification.

Separately, there was no unique increase in the 1980s after the SEC’s rule.

In 2020, the SEC acknowledged that, in real terms, gross share repurchases did not appreciably spike just after the 1982 rule. Instead, they remained relatively flat between 1983 and 1995, never surpassing $100 billion. 

While gross repurchases eventually began trending upward, that happened only after a total market capitalization (the total value of the market) spiked in the late 1990s. Even then, the value of buybacks relative to market capitalization, in both net and gross terms, remained relatively constant from 1983 to 2019. (The ratio of net repurchases to market capitalization remained flat for most years—between zero and approximately 2 percent—between 1983 and 2019.)

Perhaps more importantly for the current debate, all the anti-buyback arguments that preceded and followed the 1982 rule are the same cliched nonsense—even up to the present. It’s all been thoroughly debunked time and again.

For starters, the idea that corporate managers are engaged in a battle among shareholders, customers, and workers is ludicrous. If managers consistently send money to shareholders at the expense of investing in the equipment and workers the company needs, the company will fail to deliver to its customers and cease to exist. That’s how managers get fired. 

Unsurprisingly, years of research have demonstrated that buybacks have not systematically reduced corporate investment. Research has also shown that both share repurchases and dividends—two methods of returning value to shareholders—temporarily decrease the firm’s market value, with dividends lowering the share price and repurchases lowering the share count. In the case of buybacks, critics tend to ignore that a repurchase is an exchange of cash for shares, meaning the recipient of the cash no longer owns those shares.

Although the mix between dividends and repurchases changed between 1965 and 2021, shareholder returns showed no clear negative effect. Share repurchases do not “prop up” the firm’s value. Companies can repurchase shares for a variety of reasons, including altering the company’s capital structure or signaling views about the company’s market value.

In the absence of profitable investment opportunities, companies may choose to return cash to shareholders. This move helps people employ capital more productively; it allows shareholders to choose where to reinvest. Overall, the evidence simply does not support the critics who insist that buybacks are counterproductive and manipulative.

Ironically, these critics effectively argue that government officials can do a better job of deploying capital than corporate managers. After this past Tuesday, members of Congress should think twice before making that bet. Stripping the buyback provision from the NDAA would be an easy way for Senators to show they got the message. 

This post is cross-posted to Mind the Gap.

Source: https://www.cato.org/blog/will-republicans-learn-anything-tuesday-watch-ndaa-buyback-ban