Dollars and Jens
Monday, June 15, 2015
stock buybacks and corporate investment
So some Senators think corporate stock buy-backs constitute market manipulation, which is weird, so there's a lot one could potentially address there, but once again I find a particular bit of minutia interesting and fixate on
A growing body of research suggests that the vast amounts U.S. corporations have spent to repurchase their own stock is a chief cause of the stagnation of American wages and investment, and could be a potential source of long-term national decline.Levine's response is that if you return the money to shareholders, they're probably not just letting it sit there, and that they might be better at identifying investment opportunities than the corporations earning the money, especially if those opportunities are in industries other than where corporations are especially profitable, but also especially for those corporations that are inclined to return money to the shareholders. I've heavily interpreted and added to Levine's argument, but that last bit leads into my response, which is that the causality that she's implying is not intuitive.
Now perhaps the research to which she's referring does make that causal case; one can imagine that if some external force induced companies to return cash to investors, that would naturally reduce the amount of money they have available to invest in their own operations. The usual story, though, is that a lot of companies are returning cash to shareholders because they can't find useful internal investments; it seems worth noting that the usual biases and conflicts of interest of management are to be too quick to invest in unpromising projects instead of disgorging cash, so it would lend them credibility if they're buying out shareholders instead. The Senator's story would suggest that the buybacks leave too little cash for responsible investment, while the conventional story indicates that the buybacks are being caused by companies' having a lot of cash, so I will note that corporate cash holdings are notoriously high right now; there are unrelated reasons why one would expect cash to be higher (and debt to be lower) in equilibrium than a few years ago, but this data point at least seems much more consistent with a story of "we have a huge amount of cash and nothing useful to do with it internally, so we'll give some of it to shareholders and sit on a less huge amount of cash" than "we don't have enough cash to spend more on R&D, because we gave too much back to investors."