Dividends do not affect the ownership structure of the firm. The same set of owners retain the same % interest in the firm before and after a dividend.
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Buybacks, on the other hand, serve to shrink the pool of public owners (shares are bought from public owners and "taken private"). *IN THEORY* buybacks shouldn't affect the price of the stock more than a dividend of equivalent size would.
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...except the tax treatment is different: https://www.investopedia.com/articles/active-trading/073015/dividend-versus-buyback-which-better.asp …
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Further, in the very short term, buybacks look like demand for the stock ("information"), but do not reflect a material change in the prospects for the business. They're old news that looks like new-news. They game the market's information-gathering and pricing system.
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...all while concentrating ownership, giving managers greater power, and depriving the firm of ways to invest in growth. Buybacks should be a red flag, and yet: https://us.spindices.com/indices/strategy/sp-500-buyback-index …
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It should also be disturbing to work at a firm that engages in this sort of thing. It means management is spending time engineering share price increases rather than using cash-on-hand to invest in future growth.
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Replying to @slightlylate
Also worth noting that until the early 1980s the SEC treated stock buybacks as illegal due to their potential market distorting effects (unless you mentioned that and I missed it).
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Replying to @justinschuh @slightlylate
So, dumb question, why does a stock buyback distort the market more than stock issuance? It seems like they'd be the same, just in opposite directions.
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Replying to @jyasskin @justinschuh
Issuance is the firm taking investor money rather than returning capital to investors. That is, investors are paying to buy more of the future returns of the firm. Market gets information from those purchases.
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If the price goes down relative to the % of dilution, then the previous market price was "correct"; the marginal buyer had full information. If the price goes up (or stays higher than %-diluted reference), investors are saying shares are now worth more.
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Context also matters; is the new issuance due to a capital shortage? To fund new expansion? Some other reason?
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Regardless, there's information flowing about the business's prospects. Not true in the buyback case.
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