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Why Stock Buybacks Are Dangerous for the Economy (hbr.org)
25 points by mgh2 7 days ago | hide | past | favorite | 11 comments





What is also dangerous are zombie corporations stuffed with excess capital forced to reinvest it at subpar rates of return or go on wasteful m&a sprees because they can’t return capital to where it can be most efficiently redeployed into other investments. I’m not saying buybacks can’t be abused but if you want to see a corporate environment where capital can’t be recirculated look to Japan. I don’t think many people would say the last few decades of Japan are a great example of economic dynamism.

The common refrain among many critics is that “Wall Street” is short sighted and can’t make long term investments. Really? At this point you have 10b public valuations based on revenues which won’t appear for a decade at best (flying taxi companies anyone) while value stocks paying high free cash flow today languish at single digit earnings multiples. Any company which has a viable growth strategy for invested capital gets a ton of credit from the market, making capital return a last resort. So the idea that buybacks are somehow starving growth investment seems strained.


Not every business has room to grow by a factor of 1000 or 100 or even two though. Some of them are close to the largest and most profitable they are ever going to be. I think the criticism of Wall Street is usually that they can't leave those companies alone, and have a compulsive need to squeeze what looks like exponential growth out of them through cheap trick like cutting staffing levels and shaving R&D budgets, at the expense of long-term viability.

Th other side of the coin with regard to "economic dynamism" is robustness against systemic shocks. See for instance this company [1] which started over 1000 years ago, and due to its lack of "dynamism" has cash on hand to survive indefinitely with no revenue - a property that turned out useful when a global pandemic disrupted their operations.

Wall Street investors get absolutely no credit from me for expecting to wait ten whole years for their absurd, physics-defying hypergrowth. When they are lining up to fund a stand that will make mochi by hand for the next 1000 years, then I will concede that they may have learned a bit about long-term planning.

[1] https://www.nytimes.com/2020/12/02/business/japan-old-compan...


what corporations in America are zombies? Buybacks are happening in sectors like tech as opposed to ones like utilities, which are more zombieish


Stock buybacks are literally just a form of tax optimization. Functionally they are equivalent to dividends. You can do the same debt practices with dividends as well. Other than taxes nothing stops investors from immediately reinvesting their dividends which is the same thing as doing a stock buyback.

What really worries me is that corporations think that doing investments with the money they have borrowed doesn't even enter their minds. Somehow tax optimization has a higher rate of return than actually doing work.


It's not just tax optimization. One of the key differences between the two are that buybacks reduce the supply of the stock. As there are now more buybacks than there are new stock issuance in dollars, this means that stocks are a depreciating asset. Any argument made of depreciating currencies like the during the gold standard or Bitcoin today is equally valid towards stocks when buybacks are allowed.

> doing investments with the money

They are induced into doing so. If their competitor is doing tax arbitrage, they have to in order to compete. It's actually much worse than it seems, as investors mostly invest through index funds now. If you buyback your stock, this increases your market cap and more index funds will buy your stock, pushing prices up further. If you don't buyback your own stock with debt, the index funds will sell your stock to buy the stock of companies that do. Virtuous and vicious cycles that end with only buyback companies surviving.

The volume of buybacks and indexing is such that smart money who calculate companies values through what they actually do has no chance to move the needle, and thus smart money is reduced into betting which company will do buybacks. There's no price discovery anymore.

> they have borrowed

This is just interest rate arbitrage. The Fed has set rates at an artificially low number, and as such there are benefits to these corporations taking out as much as they can to simply buyback their stock.


The difference is firms typically don't issue bonds in order to pay dividends. That looks more like pump and dump then a tax optimization to me.

what’s the dump part

Executive team approves buyout, receives bonus due to stock price increase, repeat. Do this at the expense of company growth. Run away before the cows come home.

"When health insurer Humana Inc reported worse-than-expected quarterly earnings in late 2014 – including a 21 percent drop in net income – it softened the blow by immediately telling investors it would make a $500 million share repurchase.

In addition to soothing shareholders, the surprise buyback benefited the company’s senior executives. It added around two cents to the company’s annual earnings per share, allowing Humana to surpass its $7.50 EPS target by a single cent and unlocking higher pay for top managers under terms of the company’s compensation agreement.

Thanks to Humana hitting that target, Chief Executive Officer Bruce Broussard earned a $1.68 million bonus for 2014."[0]

[0]https://www.reuters.com/investigates/special-report/usa-buyb...


main problem is that so many firms are doing buybacks and I don’t see evidence that most of them are doing this. Might be wrong, but this indicates it can be misused vs is mostly misused

https://corpgov.law.harvard.edu/2020/10/23/the-dangers-of-bu... this is slightly informative unlike OP

it’s section on leverage supports my sense that debt financed buybacks aren’t a massive catastrophe, and are prob ok in terms of collapse. but who knows...




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