Summary of Corporate Buybacks and Capital Investment

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Corporate Buybacks and Capital Investment summary
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Executives of many US public companies are paying their investors handsome returns in the form of share buybacks and dividend outlays, now at record high levels relative to GDP. At the same time, many firms have reduced their capital investment. This scenario is potentially worrisome for overall economic growth, particularly as it also manifests across a number of OECD nations. Economists Joseph W. Gruber and Steven B. Kamin assess the relationship, causality and correlation between returns to shareholders and corporate investment allocations, and come up with some intriguing conclusions. getAbstract recommends this expert report to executives and investors. 

In this summary, you will learn

  • What message the current divergence of corporate capital investment and returns to shareholders conveys;
  • What relationship, if any, exists between the two variables; and
  • How policy makers can assess these metrics.
 

About the Authors

Joseph W. Gruber and Steven B. Kamin are economists with the Board of Governors of the Federal Reserve System.

 

Summary

Today, the ratio of the sum of corporate buybacks and shareholder dividends to GDP in the United States stands at a “historically elevated” level. Concurrently, company executives have pulled back on the reins of capital investment in plants, equipment, projects and other potential opportunities. And this is not strictly a US phenomenon: Analysts find the same pattern of reduced business investment and increased cumulative payouts via share buybacks and dividends in 25 other OECD nations. A correlation between these two variables – less capital investment and more returns to shareholder– would present a disturbing trend, as executives deliberately deploying more company capital to shareholders would mean fewer long-run commitments to spurring profitability and economic growth.


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