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I'm not surprised. I've never thought HBR had high quality stuff. This sentence alone is ridiculous: > Taking on debt to finance buybacks, however, is bad mana
by 3pt14159 7y ago
I'm not surprised. I've never thought HBR had high quality stuff. This sentence alone is ridiculous:
> Taking on debt to finance buybacks, however, is bad management, given that no revenue-generating investments are made that can allow the company to pay off the debt.
Not necessarily. Just as debt can be paid back by issuing more shares to raise capital, debt can be issued to raise money to buy back shares. It depends on whether management thinks the current valuation is too hot or too cold.
- ericd 7y agoIt can also be done to put executive options in the money...
- jsight 7y agoI agree, and I think Apple is an example of a company that uses debt in a perfectly sensible way. My fear is that these debt fueled buybacks actually create perverse incentives among options holders who have a lot to gain from short term gains in share prices.
- airstrike 7y ago> My fear is that these debt fueled buybacks actually create perverse incentives among options holders who have a lot to gain from short term gains in share prices. Reckless increasing your leverage is a great way to destroy equity value due not only to increased interest expense but also from the cost of financial distress which investors price into their models. Which is not to say companies don't do that – there's definitely a wedge between what's best for shareholders and what's best for management¹, but there's no way around it other than having shareholders run the company themselves (which comes with its own set of issues) 1. https://en.wikipedia.org/wiki/Agency_cost https://en.wikipedia.org/wiki/Agency_cost