Are companies that buy back their own shares manipulating the market?

Last week’s white paper on industrial strategy put forward a few useful ideas but ignores the main structural problem we face: the ‘financialisation’ of the economy. At a time when we urgently need to invest to raise productivity, PLCs have been putting over half their profits into buying back their own shares. This practice used to be against the law. Under common law it was treated as a kind of market manipulation. Company law, including the 2006 Companies Act, still has some hallmarks of this assumption but a radical change was made in the Companies Act of 1981. Before that, British companies were not permitted to purchase their own shares. Reliable estimates of the scale of buybacks has been published for companies making up the Standard and Poor’s 500. Professor William Lazonick of the University of Massachusetts Lowell has reported that between 2004 and 2013, 454 publicly-listed companies in the S&P 500 index in March 2014 spent 51 per cent of their net income on buybacks.

There is now widespread concern about buybacks among business leaders and in the business press.