Buybacks to Bailouts: Firm Behavior and Implications for Financial Instability

• Thesis title in Czech: Zpětné odkupy akcií a implikace pro finanční stabilitu
• Thesis title in English: Buybacks to Bailouts: Firm Behavior and Implications for Financial Instability
• English key words: Financial instability, Capital Markets, Federal Reserve, Share Repurchase, Corporate Debt, Leverage, Buyback, Free Cash Flow Bailout
• Academic year of topic announcement: 2019/2020
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 14.05.2020
• Date of assignment: 14.05.2020
• Date and time of defence: 18.06.2021 08:00
• Venue of defence: Pekařská 16, JPEK312, 312, Malá učebna, 3.patro
• Date of electronic submission: 03.05.2021
• Date of proceeded defence: 18.06.2021
• Opponents: prof. Ing. Oldřich Dědek, CSc.

Guidelines

Working hypotheses:

1. Share repurchases reached a decade high level in 2019, just as US equity indices reached their all-time zenith, suggesting correlation between share repurchases and expected equity returns.
2. Those repurchases indicate an idiosyncratic overleveraging and financial instability in equities, similar to that of the overleveraging on debt described by Hyman Minsky.
3. Novel monetary policy and low interest rate regime overseen by both Janet Yellen and Jerome Powell (following his pivot) have encouraged this behavior.
4. This behavior helped lead to the necessity of bailouts for many major companies and industries that would otherwise be avoided during the Coronavirus Pandemic event.
Methodology:
The final paper will include historical framing of the issues, with delimitation of the main actors and definitions of each of the pieces that are central to the question of share buybacks and their effect on equity markets. The meat of the analysis will reflect empirical measures of the level of share buybacks by percentage of free cash flow and its steady incline from the Great Recession, the concurrence of equity index acceleration to the upside with share repurchase levels among these major indices, and corporate debt levels during these periods. Further, debt to equity ratios among firms more broadly will be employed to indicate leverage trends as it moves alongside share repurchase frequency.

In terms of stability, attention will be paid to shifts in Federal Reserve policy, particularly from late 2018, and how that impacted the behavior sustained over the previous decade (i.e. glimpses of stability).

The paper will also make heavy use of case studies, particularly for the latter half of the paper as it describes those companies seeking bailouts despite spending extensively on share repurchases prior to the pullback of 2020, despite already declining earnings at the end of a prolonged expansionary cycle.

Historical examples will also be utilized in this section of the paper, both for companies surviving similar events as well as those that fell into bankruptcy. Key examples will include many of the airline companies in the United States, the cruise industry, the hotel industry, and the Boeing Company.

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Preliminary scope of work

This paper aims to historically frame the issues surrounding buybacks and their effects on the balance sheets of major US firms, with delimitation of the effect of buybacks from 2009 to early 2020 with scant reference to historical factors influencing the increased usage of share repurchase programs. The analysis within this historical scope will reflect empirical measures on the market-wide level of share buybacks and debt levels alongside the concurrent equity index acceleration. Further, debt levels among firms more broadly will be employed to indicate leverage trends as it moves alongside share repurchase frequency. The paper will also make use of case studies, to illustrate the corporate governance that mirrors the points and cycle posited by Minsky. The paper will conclude with potential public policy lessons offered in bailout programs and their proper application as well as open questions on Federal Reserve policy and additional issues worthy of exploration in future papers.

Basic Outline:

Abstract
Table of Contents
Introduction
Literature Review
Making Sense of Minsky’s Insights
The Buyback Build Up
Buybacks Abet the Bull Run?
Case in Point
Imbalancing the Balance Sheet
Case in Point
Self-Dealing Debt
Case in Point
CARES Act Carries Ailing Firms
Case(s) in point
Conclusion
Bibliography