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Because it is creating a huge short-term bubble of raised stock value when the companies have done nothing to actually increase their value. It's another cog in

Because it is creating a huge short-term bubble of raised stock value when the companies have done nothing to actually increase their value. It's another cog in a huge crash for no reason whatsoever except to enrich a few people.

deleted 8y ago
[deleted]
mercutio2 8y ago
This is... not how bubbles work, as far as I know? The idealized enterprise value of a firm changes not one whit whether capital is returned to investors via a dividend or a stock buy back. There could conceivably be small differences in transaction costs between the two, but in practice, they’re very similar. Generally, the enterprise value of large amounts of cash for most firms is less-than-par, because investors fear management making vanity purchases that destroy value. So long term investors are much happier if capital is returned, and much happier if the method of return is via stock buy back.
- hakfoo 8y ago
  Perhaps they should be keeping management on a tighter leash if the only likely outcomes they're capable of are "vanity purchases that destroy value" and buying back stock. If you've got mountains of free cash, there are a lot more exciting opportunities out there. You can afford to make higher-risk/higher-reward investments. You can buffer yourself from that next surprise recall/product failure/fulfillment problem. You can make sure you have a stake in anything that looks like it could someday be an existential threat.
  - mercutio2 8y ago
    Removing liquid assets from the balance sheet is the main way boards maintain a tight leash. It’s one step beneath firing an executive. There’s a reason (many) successful companies don’t just go off and become massive conglomerates attempting to pursue every idea any executive has. Areas where the board feels it has a competitive advantage, an investment opportunity, and enough management capacity to oversee the new investment are not, in fact, dime a dozen.
- tboyd47 8y ago
  If the owners of all these companies are actually afraid of their own managers allocating funds within the companies they have supposedly invested in, then what's the point of investing in anything at all? In that case, the "economy" is nothing but a bunch of fools wasting investors' money and it is certainly a bubble.
  - kgwgk 8y ago
    If your employer is afraid of you doing something different from the thing you are supossed to do, what is the point of hiring you in the first place?
    - mercutio2 8y ago
      No one trusts anyone absolutely. The principal agent problem is real and relevant for every organization of any size.
hueving 8y ago
Uh, no. As the company uses cash to buy stock it simultaneously reduces the cash hoard of the company. Anyone targeting a specific PE for a company will sell the stock to counter the increase as the cash balance (and PE) decreases.
wmeredith 8y ago
What? The value is going up because there's less stock. That's not a bubble. Scarcity is driving a price increase.

deleted 8y ago

[deleted]

mercutio2 8y ago

This is... not how bubbles work, as far as I know? The idealized enterprise value of a firm changes not one whit whether capital is returned to investors via a dividend or a stock buy back. There could conceivably be small differences in transaction costs between the two, but in practice, they’re very similar. Generally, the enterprise value of large amounts of cash for most firms is less-than-par, because investors fear management making vanity purchases that destroy value. So long term investors are much happier if capital is returned, and much happier if the method of return is via stock buy back.

hakfoo 8y ago
Perhaps they should be keeping management on a tighter leash if the only likely outcomes they're capable of are "vanity purchases that destroy value" and buying back stock. If you've got mountains of free cash, there are a lot more exciting opportunities out there. You can afford to make higher-risk/higher-reward investments. You can buffer yourself from that next surprise recall/product failure/fulfillment problem. You can make sure you have a stake in anything that looks like it could someday be an existential threat.
- mercutio2 8y ago
  Removing liquid assets from the balance sheet is the main way boards maintain a tight leash. It’s one step beneath firing an executive. There’s a reason (many) successful companies don’t just go off and become massive conglomerates attempting to pursue every idea any executive has. Areas where the board feels it has a competitive advantage, an investment opportunity, and enough management capacity to oversee the new investment are not, in fact, dime a dozen.
tboyd47 8y ago
If the owners of all these companies are actually afraid of their own managers allocating funds within the companies they have supposedly invested in, then what's the point of investing in anything at all? In that case, the "economy" is nothing but a bunch of fools wasting investors' money and it is certainly a bubble.
- kgwgk 8y ago
  If your employer is afraid of you doing something different from the thing you are supossed to do, what is the point of hiring you in the first place?
  - mercutio2 8y ago
    No one trusts anyone absolutely. The principal agent problem is real and relevant for every organization of any size.

hueving 8y ago

Uh, no. As the company uses cash to buy stock it simultaneously reduces the cash hoard of the company. Anyone targeting a specific PE for a company will sell the stock to counter the increase as the cash balance (and PE) decreases.

wmeredith 8y ago

What? The value is going up because there's less stock. That's not a bubble. Scarcity is driving a price increase.