Asset Manager Capitalism, Stakeholder Management and Share Buybacks

What the paper says

We assess what the prevalence of share buybacks can tell us about the relationship between the firm and its stakeholders in an environment in which ownership is increasingly concentrated in the hands of a small number of large asset managers. While the finance literature has put forward several reasons for the current prevalence of buybacks, we posit that without the significant institutional changes outlined in this paper, namely the rise of index investing, these triggers by themselves cannot explain their popularity. We present a game theory model in which three players vie for the cash flow of the company: managers, shareholders, and other stakeholders. We show how in a constellation in which all three players have equal power the expected outcome would be to invest the company’s surplus cash in growth opportunities. This contradicts what is observable in practice: the prevalence of buybacks. We identify ’asset manager capitalism’ as the cause and conclude that changes in the shareholder ownership structure are partly responsible for this. Shareholders have used their increased influence to supervise managers and to shape corporate policy in their favour. This paper adds to the literature on stakeholder theory an understanding of how the relative power of stakeholder groups has changed under asset manager capitalism. We do not, however, seek to take sides in the debate as to whether share buybacks are desirable or not.