The Silent Tsunami: How Share Buybacks Threaten Market Stability and Misprice Value

In today's financial markets, share buybacks have become the lifeblood of corporate cash distribution. Yet beneath the surface, a growing body of research warns that this widespread practice is sowing the seeds of systemic instability and distorting investor sentiment. Byungwook Kim's groundbreaking 2025 study, “Do Share Repurchases Increase the Value of Non-repurchasing Firms?”, reveals how buybacks artificially inflate market valuations, create competitive disadvantages for non-participating firms, and expose investors to hidden risks should the trend reverse. Here's why this matters—and how to navigate the fallout.

The Flow of Capital: A Double-Edged Sword

Kim's research shows that cash returned to investors via buybacks doesn't disappear into private hands. Instead, it often flows back into the stock market, disproportionately favoring non-repurchasing firms that share similar characteristics—such as size or valuation metrics—with the repurchasing firms. This creates a mispricing feedback loop: the value of non-buying firms rises not because of improved fundamentals, but due to the capital reallocation from buyback-driven flows.

The danger lies in the sustainability of this dynamic. As shows, buybacks now dwarf dividends in many sectors, particularly in the U.S., where they account for over 60% of cash returned to shareholders. This shift has fueled a non-fundamental flow-based mechanism—a market dynamic driven less by company performance and more by investor behavior.

The Decline of the Value Premium: A Structural Shift

One of the study's starkest findings is the collapse of the value premium—the historical outperformance of undervalued stocks (value firms) over high-growth peers. Growth firms, which dominate buyback programs, have driven this shift. Their disproportionate use of buybacks has inflated their valuations while sidelining value firms, many of which lack the cash reserves or incentive to participate in repurchases.

This is evident in sector-specific trends. For instance, highlights how capital-intensive sectors like utilities allocate less than 10% of earnings to buybacks, while tech giants plow over 30% into repurchases. The result? Growth stocks in high-buyback sectors now trade at premiums that defy traditional valuation metrics, while value stocks in low-buyback sectors are undervalued—a divergence that can't last forever.

Systemic Risks in the Buyback Boom

The concentration of buybacks among a few large firms amplifies systemic risks. If economic conditions or regulatory changes force a sudden halt to repurchases—such as a recession or tax reforms—the redirected capital flows could reverse abruptly. The demand shock to non-buying firms, particularly those reliant on this artificial valuation support, could trigger a sharp correction.

Kim's work also underscores income inequality as a byproduct. Buybacks often fund debt-driven programs at the expense of long-term investment, exacerbating wealth gaps between shareholders and employees. Meanwhile, poor timing—buybacks frequently occur at market peaks—adds to the instability.

Navigating the Buyback Maze: Investment Implications

Investors should proceed with caution. Here's how to position portfolios:

1. Reallocate Sectors Strategically:
   Focus on sectors with low buyback activity but strong fundamentals. Utilities, consumer staples, and industrials (e.g., ) often prioritize dividends and growth over buybacks. These sectors may offer undervalued opportunities once the buyback tide recedes.

2. Avoid Growth Traps:
   Growth firms in high-buyback sectors (tech, finance) are vulnerable to a valuation reckoning. Their inflated valuations may not survive a slowdown in repurchases.

3. Monitor Regulatory Signals:
   Tax reforms or stricter disclosure rules—like those in India post-2019—could reshape buyback dynamics. Stay alert to policy shifts.

4. Embrace Contrarian Value Plays:
   Value firms with solid balance sheets and organic growth potential (e.g., ) are poised to outperform if the value premium rebounds.

Conclusion: The Buyback Bubble's Breaking Point

The buyback boom has created a market where sentiment, not fundamentals, drives much of valuation. While it's a powerful tool for firms with excess cash, its overuse has distorted sector allocations, inflated growth stocks, and exposed non-participating firms to competitive disadvantages.

Investors ignoring these risks may find themselves swept up in the next market correction. Instead, focus on sectors and firms that thrive on fundamentals, not flows. The tide is turning—act before the undertow catches you.

Data sources: Byungwook Kim's 2025 study, MSCI sector indices, and corporate financial filings.