If you were an investor in Facebook, instead of Facebook investing excess cash, wouldn't you prefer Facebook to return the excess cash to investors? Then if you

If you were an investor in Facebook, instead of Facebook investing excess cash, wouldn't you prefer Facebook to return the excess cash to investors? Then if you agree that investing in startups is a winner, you could reinvest the cash through some venture fund? Or if you disagree and feel that there's a better use for the cash, such as investing in index funds or paying off your student loans or buying a yacht or whatever, you could do that instead. One of William Bernstein's Efficient Frontier articles summarises some research on this: > In the December issue [of Journal of Finance] Jarred Harford found that cash-rich firms destroyed 7 cents of corporate value for every dollar of cash reserves held. How does this happen? Let’s take two firms, both of which are considering a project or acquisition of marginal value. The first firm is cash-poor, and must obtain the capital from a bank, or a stock or bond issuance. This necessitates scrutiny of the project from the outside. The second firm is cash-rich, and thus requires no outside scrutiny—they can simply cut a check. Clearly, the cash-rich company is much more likely to make this potentially unprofitable investment. > Rajan, Servaes, and Zingales look at the performance of large conglomerates, and find that investment capital tends to flow most readily to its least productive divisions. The more highly diversified the company (i.e., the less related its component businesses) the more dramatic the effect. What is most interesting is that Harford's research found that cash-rich companies are more likely to make diversifying acquisitions—in other words, to turn them into the same companies that this paper shows are the least efficient. > [...] the February JoF contains an absolute gem from La Porta, Lopez-de-Silanes, Shleifer, and Vishny on dividend policy around the globe. Their primary finding is that in so-called "civil law" countries, such as most of Latin America, Scandinavia, and southern Europe, where investor protection is the weakest, dividend payouts are low. In so-called "common law" countries—basically the world’s English-speaking nations, where investor protection is excellent—payouts are high. Which gets back to Graham’s basic premise; investors prefer dividends and take them whenever the law and culture allow. The authors reinforce the points made by Graham and the other pieces; "failure to disgorge cash leads to its diversion or waste, which is detrimental to outside shareholders’ interest." > But what is most remarkable about this piece is its tone, which is almost Menckenesque in its description of modern corporate ethics. They describe a Hobbesian world in the kind of plain English rarely seen in academic finance; "Firms appear to pay out cash to investors because the opportunity to steal or misinvest it are in part limited by law, and because minority shareholders have enough power to extract it." -- http://www.efficientfrontier.com/ef/700/agency.htm http://www.efficientfrontier.com/ef/700/agency.htm