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1 1 (February 27, 2019)

handle is hein.crs/govzic0001 and id is 1 raw text is: Stock Buybacks: Background and Reform Proposals February 27, 2019 In 2018, U.S. corporations announced plans to buyback a record $1.08 trillion of their own stock-a trend that has attracted scrutiny and generated a number of legislative proposals designed to curb the practice's prevalence. This Legal Sidebar provides a general overview of the regulatory framework surrounding stock buybacks and these recent reform proposals. The Sidebar (1) reviews the debate over the social value of stock buybacks, (2) discusses the regulatory regime surrounding buybacks, and (3) examines a number of proposals to reform this framework that have been proposed in legislation, popular commentary, and the academic literature. The Debate When publicly traded corporations seek to return money to their shareholders, they have two options: (1) pay shareholders a cash dividend, or (2) repurchase shares of their own stock and thereby drive share prices higher. The choice between paying a dividend and repurchasing stock involves a variety of considerations. In theory, corporate managers may pay a dividend instead of initiating a buyback when they believe their company's stock is overvalued. Dividends also provide shareholders with the ability to remain invested in a company while receiving a regular income stream. By contrast, corporate managers may prefer stock buybacks over dividends because of tax considerations (dividends are taxable, while unrealized capital gains are not), a belief that their company's stock is undervalued, a desire to reorient their company's capital structure away from equity and towards debt financing, or (more controversially) because buybacks can help managers meet short-term share price targets. The use of stock buybacks to distribute excess cash has increased significantly since the early 1980s, both in absolute terms and in comparison with the payment of dividends. In 1980, U.S. corporations repurchased $6.6 billion of their own stock. By 2000, that amount had grown to roughly $200 billion- still a far cry from the over $1 trillion in buybacks announced last year. Moreover, although 80 to 90 percent of cash payouts by publicly traded corporations took the form of dividends before the early 1980s, S&P 500 companies spent 54 percent of their net income on buybacks between 2003 and 2012, while paying out only 37 percent as dividends. This surge in the volume of buybacks has generated scrutiny from a number of lawmakers, regulators, and financial market professionals. Some critics have argued that buybacks represent a form of short-term Congressional Research Service https://crsreports.congress.gov LSB10266 CRS Legal Sidebar Prepared for Members and Committees of Congress

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