In 2023, U.S. companies dumped $900 billion into stock buybacks—more than they spent on wages or R&D combined. At their core, a stock buyback happens when a company uses its own money to repurchase shares from the stock market, reducing the number of outstanding shares. This benefits existing shareholders by increasing the value of the remaining shares, making it a common strategy for corporations looking to boost stock prices.

But while some argue that buybacks stabilize stock prices and return value to investors, others see them as a legalized form of market manipulation, disproportionately benefiting executives and wealthy shareholders while diverting money that could be spent on wages, R&D, or long-term growth.

Initially, I saw buybacks as a tool of corporate greed, allowing companies to artificially inflate stock prices instead of investing in their businesses. But as I dug deeper, I realized buybacks aren’t the root problem—they’re a symptom of a broken system that prioritizes short-term stock growth over long-term sustainability. The problem isn’t that companies can do buybacks—the problem is that they’re rewarded for doing them over everything else.

The Historical Shift: Buybacks Were Once Illegal

What most people don’t realize is that buybacks were illegal until 1982. Under SEC Rule 10b-18, corporations were finally allowed to repurchase their own shares without it being considered stock manipulation—a change that fundamentally altered how capital was distributed.

Before 1982, excess corporate profits were more likely to be reinvested into business expansion, wage increases, pensions, and R&D. After deregulation, buybacks became a primary tool for returning capital to shareholders, often at the expense of long-term investment.

The explosion of buybacks in the 1990s and 2000s coincided with stagnating wages and growing income inequality—a trend that has only accelerated.

The Core Issue: Buybacks Fuel Income Inequality

The biggest flaw in the buyback system is who benefits. Proponents claim buybacks help all investors—but the reality is that executives and major shareholders capture the vast majority of the gains.

  • A 2022 report from the Economic Policy Institute found that over 80% of stock buyback gains go to the top 10% of wealth holders, with executives being the primary beneficiaries.
  • Workers see little to no impact, as wage growth has remained stagnant despite record-breaking buybacks.
  • Retail investors (everyday stockholders) don’t gain as much as institutions, since hedge funds and large shareholders time buyback cycles to maximize their profits.

Essentially, buybacks act as a wealth transfer mechanism—redirecting money that could have been reinvested into the company or workers, however is found in the hands of executives and institutional investors.

The Role of Executive Compensation in Driving Buybacks

One of the biggest reasons buybacks are so heavily used is that executive pay is directly tied to stock price performance.

CEOs and corporate leadership often receive stock options or restricted stock units (RSUs) as their primary form of compensation, meaning they personally profit when the stock price rises.

This creates a clear conflict of interest:

  • Instead of focusing on long-term growth, executives have an incentive to pump the stock price in the short term—even if it comes at the expense of the company’s future.
  • The easiest way to boost stock price without actually improving the company? Stock buybacks.

It’s why we see executives selling off massive amounts of stock immediately after buybacks are announced—they engineer a price surge and cash out at the peak.

If we don’t address the incentive structure behind executive compensation, buybacks will continue to be used as a personal payday for corporate leadership.

The Role of Shareholder Pressure & Activist Investors

One of the biggest reasons corporations prioritize stock buybacks isn’t just executive greed—it’s pressure from institutional investors and activist hedge funds.

  • Activist investors (e.g., Elliott Management, Carl Icahn) often push companies to buy back shares instead of reinvesting in their business.
  • Hedge funds thrive on short-term stock movements and frequently demand aggressive buyback programs to boost returns quickly before exiting their positions.
  • A study from Harvard Business Review found that companies targeted by activist investors increase buybacks by 38% within two years of shareholder pressure.

In many cases, corporate leadership isn’t choosing buybacks because they believe it’s best for the company long-term—they’re doing it to keep shareholders happy in the short term.

This reinforces why tax incentives for long-term reinvestment are necessary—because as long as Wall Street rewards immediate stock price boosts, companies will keep prioritizing financial engineering over sustainable growth.

What’s Lost: The Opportunity Cost of Buybacks

Beyond stock manipulation and income inequality, the real cost of buybacks is what companies aren’t doing with that money.

Companies that prioritize stock buybacks often neglect other critical areas, such as:

  • R&D and Innovation: Many corporations spend more on buybacks than research & development. For example, Boeing is often cited as a cautionary tale of stock buybacks replacing critical reinvestment. From 2013 to 2019, Boeing spent over $43 billion on buybacks, significantly more than it invested in R&D and safety improvements during the same period.

    While it would be oversimplified to blame buybacks alone for the 737 MAX disasters, critics argue that Boeing prioritized short-term stock price gains over engineering excellence. The company cut costs aggressively and outsourced key software development—which later contributed to system failures in the 737 MAX leading to two fatal crashes.

    This highlights a key issue: when executives are financially incentivized to boost stock prices in the short term, long-term priorities like product safety, innovation, and workforce development can take a backseat.

  • Worker Wages & Benefits: Despite record profits, many major companies have not significantly increased wages, choosing instead to funnel cash into stock repurchases.

  • Business Expansion: Instead of opening new locations, hiring more workers, or improving infrastructure, companies focus on financial engineering to maintain shareholder confidence.

From 2010 to 2019, S&P 500 companies spent more money on stock buybacks than they did on capital expenditures and innovation combined. This means that instead of building the future, they’ve been propping up stock prices.

Counterarguments: What About Companies That Would Hoard Cash?

One common argument against restricting buybacks is that if companies can’t repurchase their stock, they’ll just sit on excess cash instead of reinvesting.

That’s a valid concern, and it’s why simply banning buybacks wouldn’t work. If companies aren’t forced to reinvest, many will just hoard capital, distribute it through dividends, or engage in other forms of financial engineering.

That’s why the solution isn’t banning buybacks—it’s making reinvestment the smarter financial move.

  • Multi-year tax incentives ensure companies see greater returns from raising wages and funding R&D than from stock repurchases.
  • Buyback lock-ups don’t ban buybacks—they just prevent insider abuse, keeping them as a tool for legitimate use.
  • Scaled taxation on buybacks discourages excessive stock repurchases without eliminating them entirely.

This approach preserves buybacks as a financial tool for stability while reducing abuse and short-termism.

The Solutions: Reforming Buybacks, Not Banning Them

Originally, I thought banning buybacks was the answer—but that ignores the root cause of why they happen in the first place. Instead, I now believe the best approach is reforming the way buybacks are used while incentivizing companies to reinvest in workers and growth.

1. Buyback Lock-Up Period (6-12 Months)

  • Executives should be banned from selling stock for 6-12 months after a buyback.
  • This prevents pump-and-dump behavior, where leadership artificially inflates stock prices and immediately cashes out.

2. Scaled Taxation on Buybacks

  • Large corporations should pay a higher tax on buybacks, while smaller businesses should face lower rates.
  • This discourages massive buyback cycles while ensuring companies can still use them when necessary.

3. Multi-Year Reinvestment Tax Breaks

  • Companies that increase worker wages, expand benefits, or invest in safety improvements should receive tax credits that increase over time (50% → 125% → 175%).
  • Companies that cut wages or benefits after taking the tax break must repay it in full.

4. Domestic Investment Multiplier

  • Companies that keep at least 80% of their workforce in the U.S. receive an extra multiplier on tax breaks.
  • This prevents the incentive from pushing companies to offshore jobs instead of reinvesting domestically.

5. Alternative Global Approaches

  • The EU requires shareholder approval for stock buybacks, giving investors more control.
  • Japan limits buybacks to 25% of total shares, ensuring they don’t become the dominant form of capital distribution.
  • The U.S. could implement similar policies to prevent buybacks from overshadowing R&D, wages, and infrastructure investment.

Final Thoughts: Fixing the Market, Not Just Buybacks

I started out thinking buybacks were the problem, but I now see them as a symptom of a financial system that rewards short-term gains over long-term stability.

✔ Executives are financially incentivized to manipulate stock prices through buybacks.
✔ Shareholder pressure forces companies to prioritize stock growth over reinvestment.
✔ Workers and long-term investments get left behind because they don’t provide immediate returns.

If we want real change, we can’t just ban buybacks—we have to fix the incentives that drive them.

That means restricting executive sell-offs, taxing reckless buybacks, and making real investment in workers and innovation the more profitable choice.

Until then, buybacks will remain the stock market’s legal cheat code—rewarding the few at the expense of everyone else.