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1 1 (April 16, 2020)

handle is hein.crs/govcqzz0001 and id is 1 raw text is: FF.ri E.$~ & April 16, 2020 Stock Buybacks and Company Executives' Profits A stock buyback occurs when a publicly traded firm repurchases some of its shares from investors with excess cash or borrowed funds. In recent years, the annual aggregate value of such repurchases has risen to historical highs, reaching nearly $1 trillion as firms, such as Apple, Exxon Mobil, Microsoft, IBM, Visa, Citigroup, Cisco, Pfizer, Oracle, and Bank of America, have conducted billion-dollar-plus stock repurchases. As aggregate buyback levels have soared, general scrutiny of them has intensified. The scrutiny also appears to have heightened after the 2017 tax revision (P.L. 115-97) was enacted. This tax legislation resulted in overall corporate tax cuts that increased surplus corporate cash, which in turn led to significant increases in buybacks at various firms. Legislation related to buybacks has been introduced in the 116th Congress. S. 915 and H.R. 3355 would prohibit a firm from conducting a buyback. S. 2391 would ban buybacks unless they were accompanied by new buyback disclosure reforms. S. 2514 and H.R. 4419 would levy a tax on companies that did not distribute a worker dividend from their profits. The dividend's size could be based on the size of the company's recent stock buyback. As part of broad private equity fund reform, S. 2155 and H.R. 3848 would prohibit firm buybacks in which a private equity fund has acquired a controlling interest. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) bars certain eligible firms that receive Department of the Treasury loans from conducting buybacks for the loan's duration plus a year afterward. Some observers have central concerns that buybacks (1) represent a problematic short-term oriented use of firm assets at the expense of longer-term investments; (2) can be exploited by senior executives for personal financial gain; and (3) are often debt-financed, which can boost a firm's vulnerability. Others, however, emphasize that buybacks (1) can help signal that a company's stock is undervalued; (2) are often used to offset share dilution after new stock is issued to facilitate stock- and stock option-based employee compensation programs; (3) represent the most financially prudent use of a company's excess cash to finance itself; (4) represent shareholders reinvesting cash proceeds to boost capital formation; and (5) have arguably buoyed the past decade's bull stock market. A firm's net income (also called net profit) is the remaining cash after operating expenses, interest, and taxes are deducted from its revenue. It is also the funding source for voluntary quarterly distributions to shareholders known as dividend payments. A firm may also use its net income to buy back or repurchase its shares on the open market (the secondary stock market where shares are traded). Stock reacquired via a buyback is called treasury stock, which is either permanently removed from stock-market circulation or retained by a company to be resold in the future. Some publicly traded firms may choose not to pay dividends or conduct buybacks; some may conduct a buyback and pay dividends during the same period; and others may do one but not the other. A buyback and a dividend are similar in the sense that they both involve redistributing cash to shareholders. Dividends, however, have a much longer history and tend to represent an ongoing commitment to shareholders that firms may be reluctant to overlook for fear of sending a negative signal to securities markets. Firms are not generally expected to continue buybacks year after year. Aggregate dividend payments previously generally surpassed buybacks in size. By the late 1990s, the aggregate annual size of stock buybacks generally exceeded that for dividend payments. As indicated earlier, buyback scrutiny appeared to have heightened after the 2017 tax revision. After the reforms went into effect, historically robust dividend payments ensued, but the significant increases in stock buybacks received more media attention. ..... guhb \. ,- k - , 's. - ,, . ,, 0 . b - In 1982, the Securities and Exchange Commission (SEC), which regulates equity market trading, adopted Rule 10b-18 that provides companies with a legal safe harbor during a stock buyback program. Rule 10b-18 ensures firms that repurchase stock generally would not be subject to legal liability for manipulation under the Securities and Exchange Act of 1934 (P.L. 73-291) if the volume of daily stock buybacks does not exceed 25% of the previous four weeks' average daily trading volume in company stock. By various accounts, in the years soon after Rule 10b-18 went into effect, there was significant growth in buybacks, which are annually dominated by a few large well-capitalized firms. According to Reuters, between 2010 and 2014, 60% of the approximately 4,000 publicly traded nonfinancial U.S. companies conducted buybacks. Several decades ago, many publicly traded firms' top executives began receiving a significant amount of their compensation in the form of long-term-incentive (LTI) pay, which is long-term compensation designed to incentivize executives to perform in ways to help achieve a firm's strategic objectives, purportedly better aligning their interests with those of shareholders. LTI pay tends to be mppm qq\ p\w gn'a', ggmm a 'S I 11LIANJILiN,

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