The allocation of corporate resources between investments and shareholder payouts is a fundamental issue in corporate finance. How managers deploy cash flows has profound implications for firms’ value, economic growth, and societal welfare. On the one hand, reinvesting cash flows into productive assets can drive innovation, create jobs, and generate long-term value. On the other hand, returning excess cash to shareholders through dividends or share repurchases can incentivize managers to act in shareholders’ best interests and allow capital to flow to its highest-value uses in the economy. Understanding this trade-off is crucial for evaluating corporate governance mechanisms, managerial incentives, and financial regulations.

Share repurchases—when a company buys back its own shares—have emerged as an important and controversial form of shareholder payout. Unlike dividends, which tend to entail longer-term commitments, repurchases offer managers greater flexibility in the timing and magnitude of payouts. This flexibility can aid in managing temporary changes in cash flows or signaling undervaluation. However, substantial concerns remain about the potential misuse of repurchases. Critics argue that the growing prevalence of repurchases may incentivize managers to sacrifice long-term investments in favor of short-term stock price appreciation.

As the volume of stock buybacks grew over the past decade, reaching a record $1.2 trillion in 2022, the debate about stock buybacks spilled over into the public arena. Asset managers, leading corporate lawyers, and senior politicians have raised concerns about the extent to which repurchases deprive firms of the capital needed for long-term investment, innovation, and employee compensation.

These concerns have spurred legislative proposals in the United States from both sides of the aisle to limit share repurchases. In 2018, Senator Tammy Baldwin (D‑WI) introduced the Reward Work Act, which proposes banning share repurchases outright. Senator Marco Rubio (R‑FL) called for eliminating the tax advantage of stock buybacks over dividends. These regulatory efforts culminated in the passage of the Inflation Reduction Act in 2022, which includes a 1 percent tax on repurchases. In 2023, Senator Sherrod Brown (D‑OH) proposed the Stock Buyback Accountability Act, which would increase the tax to 4 percent, while several representatives again considered banning stock repurchases entirely. Interest in regulating stock buybacks has also gained prominence in other major economies, including the United Kingdom, the European Union, and Japan.

There is limited and mixed academic evidence to inform policymakers about the impact of repurchases on corporate investments. Our research addresses this lack of evidence by examining the staggered legalization of share repurchases across 17 countries between 1985 and 2010. Our analysis reveals that legalizing share repurchases increased investment by 8.0–9.8 percent among public firms, as measured by capital expenditures and spending on research and development. This effect was driven entirely by firms that did not repurchase shares within two years of legalization (approximately 93.5 percent of the firms we studied). These firms tended to be younger, smaller, and higher-growth, and typically held less cash. These findings suggest that legalizing share repurchases allowed capital to flow from cash-rich, mature firms to cash-needy firms with greater growth opportunities.

Our study provides further evidence that legalizing repurchases improved public companies’ access to equity capital. First, legalization was associated with a shift in firms’ capital structures from debt toward equity, evidenced by decreased debt issuance and outstanding debt, coupled with increased equity issuance and equity levels. Second, legalization was associated with improvements in sales growth, profitability, and market valuation, indicating that companies increased investment in profitable opportunities. Third, investment increases were at least twice as large in legalizing countries with greater barriers to capital access, less competitive equity markets, more cash-rich firms, and greater buyback volume.

Our research has important implications for public policy and corporate governance. Ongoing legislative efforts to restrict share repurchases are largely based on the belief that buybacks harm corporate investment. On the contrary, our findings suggest that buybacks boost corporate investment and are especially beneficial in countries with more severe capital allocation inefficiencies.

Note
This research brief is based on Elliot Tobin and Charles C. Y. Wang, “Does Share Repurchase Legalization Really Harm Corporate Investments?,” Harvard Business School Working Paper no. 26–014, September 2025.