Short-term and long-term shareholders: allies or foes? Evidence from share repurchases

Purpose Critics argue that share repurchases lead firms to underinvest at the expense of long-term value, especially when short-horizon investors are present, yet theory offers conflicting predictions. This paper aims to reframe the debate around investment efficiency rather than investment levels, asking whether buybacks are associated with investment inefficiency when short-term investors hold larger stakes. Design/methodology/approach Using a sample of US firms over 1988–2020, the authors estimate expected investment and relate deviations from it to share repurchases and short-term (transient) institutional ownership. The analysis is validated using alternative measures of repurchases and investor horizon and methods that address endogeneity. Findings Share repurchases are negatively associated with investment levels, but this does not reflect underinvestment. Short-horizon investors are associated with greater overinvestment, which repurchases significantly mitigate. Results are robust to alternative specifications and an instrumental variable approach. Practical implications The findings caution against policy proposals that restrict buybacks on the presumption that they harm investment, pointing instead to investment efficiency as the more relevant concern. Originality/value By shifting attention from the quantity of investment to its quality, the paper shows that share repurchases need not be detrimental to long-term firm value and may mitigate overinvestment associated with short-horizon investors.