4 ms·

But if you're a rich person and not an idiot, you should be glad to see public companies offer buybacks. No, because there is a principle-agent problem. As a n

But if you're a rich person and not an idiot, you should be glad to see public companies offer buybacks. No, because there is a principle-agent problem. As a non-professional, long-term investor, I want the interests of the executive team to be aligned with my own interests. If a company puts all its profits into buybacks, it is very easy for the company to never return a penny to investors. The executives can continually dilute shareholders by issuing stock options, and then use buybacks to counter-act the dilution and prop up the share price so that they can cash out on the options. The buyback program enables short-term thinking by the executives, which is contrary to my own interests as a long-term shareholder.

nostrademons 10y ago
The principal agent problem works in the opposite direction from how you describe. Companies are incentivized to offer buybacks when they, with their inside information, believe the stock price is undervalued. They get more of a pop in EPS for a given amount of cash returned to stockholders, which - as someone who is usually compensated in stock - will make them personally wealthier. A buyback is a return of cash to the shareholders. The mechanics of it is that the company buys its own shares on the open market, and in exchange for that, pays out cash from the company treasury to the shareholders.
- devinhelton 10y ago
  The principal agent problem works in the opposite direction from how you describe. Companies are incentivized to offer buybacks when they, with their inside information, believe the stock price is undervalued. This is how buybacks are rationalized, but I don't think it makes any sense. The company, ie, the CEO, are not experts in knowing if their own stock is undervalued, nor should they be. CEO's are, and ought to be, irrationally optimistic. They also are the chief salesmen for their company, they are always pitching how the next product line is going to be a home-run. And to pitch effectively, you have to really believe it, even if rationally you should know that most product lines fail. There was a quote from Andy Grove about this, via Ben Horowitz http://a16z.com/2015/11/13/high-output-management/ http://a16z.com/2015/11/13/high-output-management/: “In order to build anything great, you have to be an optimist, because by definition you are trying to do something that most people would consider impossible. Optimists most certainly do not listen to leading indicators of bad news.” But this insight won’t be in any book. When I suggested he write something on the topic, his response was: “Why would I do that? It would be a waste of time to write about how to not follow human nature. It would be like trying to stop the Peter Principle. CEOs must be optimists and all in all that’s a good thing.”* A buyback is a return of cash to the shareholders. I agree that in theory, a buyback should be identical to a dividend. But, when taking account the difficulties of aligning interests between shareholders and execs, buybacks make it a lot easier for executives to profit short-term, even when their company does not do so well in the long-term.

nostrademons 10y ago

The principal agent problem works in the opposite direction from how you describe. Companies are incentivized to offer buybacks when they, with their inside information, believe the stock price is undervalued. They get more of a pop in EPS for a given amount of cash returned to stockholders, which - as someone who is usually compensated in stock - will make them personally wealthier. A buyback is a return of cash to the shareholders. The mechanics of it is that the company buys its own shares on the open market, and in exchange for that, pays out cash from the company treasury to the shareholders.

devinhelton 10y ago
The principal agent problem works in the opposite direction from how you describe. Companies are incentivized to offer buybacks when they, with their inside information, believe the stock price is undervalued. This is how buybacks are rationalized, but I don't think it makes any sense. The company, ie, the CEO, are not experts in knowing if their own stock is undervalued, nor should they be. CEO's are, and ought to be, irrationally optimistic. They also are the chief salesmen for their company, they are always pitching how the next product line is going to be a home-run. And to pitch effectively, you have to really believe it, even if rationally you should know that most product lines fail. There was a quote from Andy Grove about this, via Ben Horowitz http://a16z.com/2015/11/13/high-output-management/ http://a16z.com/2015/11/13/high-output-management/: “In order to build anything great, you have to be an optimist, because by definition you are trying to do something that most people would consider impossible. Optimists most certainly do not listen to leading indicators of bad news.” But this insight won’t be in any book. When I suggested he write something on the topic, his response was: “Why would I do that? It would be a waste of time to write about how to not follow human nature. It would be like trying to stop the Peter Principle. CEOs must be optimists and all in all that’s a good thing.”* A buyback is a return of cash to the shareholders. I agree that in theory, a buyback should be identical to a dividend. But, when taking account the difficulties of aligning interests between shareholders and execs, buybacks make it a lot easier for executives to profit short-term, even when their company does not do so well in the long-term.