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Wasn't buybacks banned for a longtime in the century? Perhaps you consider this to be socialism and that's why it was unbanned, but given the perverse incentive

Wasn't buybacks banned for a longtime in the century? Perhaps you consider this to be socialism and that's why it was unbanned, but given the perverse incentives politicians seemed to have had for the past few decades, I don't see an unbiased argument why it was in the interest of the public to unban stock buyback. Clearly the past year has proven why it should have stayed banned.

senordevnyc 7y ago
Should dividends be banned? Would you be equally upset if these companies paid out their profits in dividends? Or maybe you’re suggesting we should have liquidity requirements for all businesses like we do for banks? That’s actually not the worst idea in a world where we’re going to be bailing companies out. If you want a bailout, you have to have a rainy day fund to make it less likely you’ll need one.
- digitaltrees 7y ago
  Dividends are fundamentally different than stock buy backs. They are the distribution of profit to owners of a business. No nonpublic information involved. No misaligned incentives. Yes, liquidity requirements and add personal liability for executives if their firm goes through bankruptcy, or restructuring. Goldman Sachs was a partnership until the 90s with each banker personally liable for the firms debts. They took risk much more seriously then.
  - airstrike 7y ago
    > They are the distribution of profit to owners of a business. So are buybacks
    - digitaltrees 7y ago
      No they are not. They reduce the amount of equity and raise the stock price but unless the share holder sells there is no real gain. That’s not to say buy backs don’t convey possible value but it’s not accurate to say they are the distribution of profit any more than if the company bought stock of another company (like yahoo buying alibaba stock) or a piece of equipment. In all cases the company has value reflected on its balance sheet. There is no true net gain.
      - mercutio2 7y ago
        You have made dozens of posts repeating this argument. It’s just mathematically inaccurate. Modulo taxes, in liquid markets, existing shareholders are compensated identically with share buybacks and with reinvested dividends. If you wouldn’t have chosen to reinvest your dividends, you can sell a fraction of your shares to achieve the same effect. You may think there are social or cultural reasons why one return of capital is preferable to another (I can’t tell, you haven’t made any of those arguments as far as I can see), but mathematically, a return of capital is cash in existing shareholder hands, and there’s no difference between the two approaches. Share buybacks have an impact on taxes paid, but we have a system where people are encouraged to minimize taxes, so you’d need to make an argument about tax rates for that to make sense. It’s true that changing the number of shares for the same size pot of money has an impact on share based compensation schemes, but that’s an argument about not liking share based compensation.
        digitaltrees 7y ago
        I am not arguing they are mathematically identical. I am highlighting some of the meaningful differences. Stock buy backs make stock prices go up. Dividends do not. Stock buybacks have timing risk dividends do not. If an executive is paid in stock, and has compensation tied to stock price then there is an incentive to conduct stock buy backs and not issue dividends. Further, declaring a dividend sets future expectations of performance that management is hesitant to be tied to as missing dividend payments lowers stock prices. My point is that these incentives causes management to spend more company resources on buy backs than they would on dividends because there is a personal benefit. This harms stockholders because they lose the option to use the dividend. Not every investor wants to reinvest, some want to use the dividend. So no, they are not equivalent as you say. There are meaningful practical considerations that make dividends better for shareholders and buy backs better for managers.
        airstrike 7y ago
        Dividends also make prices go up. They're just priced in in advance. Look it up.

senordevnyc 7y ago

Should dividends be banned? Would you be equally upset if these companies paid out their profits in dividends? Or maybe you’re suggesting we should have liquidity requirements for all businesses like we do for banks? That’s actually not the worst idea in a world where we’re going to be bailing companies out. If you want a bailout, you have to have a rainy day fund to make it less likely you’ll need one.

digitaltrees 7y ago
Dividends are fundamentally different than stock buy backs. They are the distribution of profit to owners of a business. No nonpublic information involved. No misaligned incentives. Yes, liquidity requirements and add personal liability for executives if their firm goes through bankruptcy, or restructuring. Goldman Sachs was a partnership until the 90s with each banker personally liable for the firms debts. They took risk much more seriously then.
- airstrike 7y ago
  > They are the distribution of profit to owners of a business. So are buybacks
  - digitaltrees 7y ago
    No they are not. They reduce the amount of equity and raise the stock price but unless the share holder sells there is no real gain. That’s not to say buy backs don’t convey possible value but it’s not accurate to say they are the distribution of profit any more than if the company bought stock of another company (like yahoo buying alibaba stock) or a piece of equipment. In all cases the company has value reflected on its balance sheet. There is no true net gain.
    - mercutio2 7y ago
      You have made dozens of posts repeating this argument. It’s just mathematically inaccurate. Modulo taxes, in liquid markets, existing shareholders are compensated identically with share buybacks and with reinvested dividends. If you wouldn’t have chosen to reinvest your dividends, you can sell a fraction of your shares to achieve the same effect. You may think there are social or cultural reasons why one return of capital is preferable to another (I can’t tell, you haven’t made any of those arguments as far as I can see), but mathematically, a return of capital is cash in existing shareholder hands, and there’s no difference between the two approaches. Share buybacks have an impact on taxes paid, but we have a system where people are encouraged to minimize taxes, so you’d need to make an argument about tax rates for that to make sense. It’s true that changing the number of shares for the same size pot of money has an impact on share based compensation schemes, but that’s an argument about not liking share based compensation.
      - digitaltrees 7y ago
        I am not arguing they are mathematically identical. I am highlighting some of the meaningful differences. Stock buy backs make stock prices go up. Dividends do not. Stock buybacks have timing risk dividends do not. If an executive is paid in stock, and has compensation tied to stock price then there is an incentive to conduct stock buy backs and not issue dividends. Further, declaring a dividend sets future expectations of performance that management is hesitant to be tied to as missing dividend payments lowers stock prices. My point is that these incentives causes management to spend more company resources on buy backs than they would on dividends because there is a personal benefit. This harms stockholders because they lose the option to use the dividend. Not every investor wants to reinvest, some want to use the dividend. So no, they are not equivalent as you say. There are meaningful practical considerations that make dividends better for shareholders and buy backs better for managers.
        airstrike 7y ago
        Dividends also make prices go up. They're just priced in in advance. Look it up.