Excess Capital, Buybacks and Shareholder Remuneration Illusion and Reality

Share buybacks are increasingly presented as a means of remunerating shareholders and creating value, often alongside dividend distributions. However, the financial and accounting effects of share repurchases do not necessarily translate into genuine economic value creation. This paper critically examines buybacks from an integrated economic, financial, accounting, managerial and regulatory perspective, focusing on listed companies and, in particular, the banking sector. The analysis distinguishes between capital distribution and the generation of economic value, showing that mechanical increases in earnings per share (EPS), return on equity (ROE) and risk-adjusted performance indicators do not, in themselves, demonstrate improved underlying profitability or additional value creation. Drawing on the Dividend Discount Model in its Excess Capital formulation, the paper examines the implications of share repurchases for bank valuation and capital management. It also proposes a distinction between conventional excess capital, assessed against regulatory and managerial benchmarks, and substantive excess capital, evaluated in a broader economic perspective that accounts for risks not fully captured by conventional measures of capital adequacy. The analysis does not reject buybacks as such. Rather, it argues that their appropriateness must be assessed in relation to the company’s financial position, strategic objectives, prudential requirements and alternative uses of available resources. Particular attention is given to the opportunity costs of repurchases, their potential effects on managerial incentives and market expectations, and the responsibilities of boards of directors in evaluating and communicating such transactions. Buybacks should therefore be understood primarily as a capital management instrument, not as an inherently remunerative mechanism or a guarantee of value creation. Their merits depend on the specific circumstances in which they are undertaken and on their contribution to the company’s long-term economic and financial sustainability.