Warren Buffett has slammed democrats and critics of stock buybacks. In Berkshire Hathaway’s annual letter to shareholders, Warren Buffett has labeled them as ‘economic illiterates’ and ‘silver tongued demagogues’. Is Warren Buffett correct?

The buyback critics argue that buybacks are nefarious. They argue that CEOs might engage in a buyback to reduce the number of shares outstanding, thereby mechanically boosting earnings per share and hitting bonus targets. Buyback critics also suggest that buybacks divert cash from internal investments that would otherwise create value.

Buyback critics are incorrect and the assertions are not evidence based. A recent large scale study found no evidence that CEOs use buybacks to hit earnings targets. This study also found that firms buyback stock using surplus cash. That is, firms invest in profitable projects first and buyback stock from the surplus second. This is laudable. Excess cash holdings are often associated with value destruction. And, the decision to return excess cash to shareholders reduces such a risk. Buybacks thus enable an efficient redeployment of capital, which ultimately creates more economic growth.