6 ms·

I find it funny that people throw out decades of history. Options contracts, as you propose, introduce the incentive for extreme risk taking because doing "norm

I find it funny that people throw out decades of history. Options contracts, as you propose, introduce the incentive for extreme risk taking because doing "normal boring" things literally doesn't pay. It's one of the main arguments for stock compensation because if the company does poorly, the CEO directly feels it where it hurts (the wallet).

sn41 6y ago
And so they go for stock buyback strategies. Reduce the supply, the stock skyrockets, cash in, leave.
- MattGaiser 6y ago
  You need profits for stock buybacks. Buybacks are just superior to dividends as a way to return capital.
  - andromeduck 6y ago
    Dividends ought to not be at a tax disadvantage over capital gains for this reason.
    - MattGaiser 6y ago
      The problem is also unrealised gains vs realised ones. I don't pay any tax on the stock price increasing. I have to pay tax on dividends. If I don't need the money, I can just let it continue to grow tax free.
    - wrigby 6y ago
      Are they not? I thought qualified dividends (that is, dividends on stocks that have been held long enough to qualify for long-term capital gains) are taxed at the long-term capital gains rate.
      - freeone3000 6y ago
        You still have the one year of dividends taxed at the short-term rate, since dividends are taxed on disbursement whereas capital gains is only taxed on stock sale.
      - toast0 6y ago
        Dividends are taxable at the time of distribution; the price effects of a buyback are taxable when shares are sold [1], and delayed taxes are preferable to immediate taxes. [1] unless the holder has elected for trader tax treatment, in which case shares are marked to market at the end of the tax year
  - hctaw 6y ago
    I think most criticism of buybacks would go away if we eliminated the capital gains tax and treated income equally regardless of where it comes from.
  - hammock 6y ago
    >You need profits for stock buybacks. You merely need capital. Lots of buybacks are funded by debt
    - deleted 6y ago
      [deleted]
    - enos_feedler 6y ago
      This is pretty insane actually. Is there a common metric that captures which companies are funding buybacks with debt? or is it easy to figure out? I am not a finance person.
      - georgeecollins 6y ago
        If the long term debt increases during a period of buybacks, particularly more than net income, than yeah this is the case. And yes that happens. BTW, this is exactly what private equity companies do when they take a company private. They borrow a lot of money to buy the outstanding stock. Often the company they are buying with debt (held by the company) is not profitable. And sometimes the company goes bankrupt. So yes this happens.
      - sokoloff 6y ago
        With interest rates as low as they are (on both government backed and corporate investment grade bonds) and a reasonable forecast of higher inflation ahead, why shouldn't companies borrow for a variety of corporate activities, both operational and treasury?
        imtringued 6y ago
        They should, and they should use the money to do the corporate activities you mentioned.
      - hammock 6y ago
        No. But it's generally common knowledge. Here are some articles https://fortune.com/2019/08/20/stock-buybacks-debt-financed/ https://fortune.com/2019/08/20/stock-buybacks-debt-financed/ https://www.cnbc.com/2019/07/29/buybacks-companies-increasingly-using-debt-to-repurchase-stocks.html https://www.cnbc.com/2019/07/29/buybacks-companies-increasin... https://crsreports.congress.gov/product/pdf/IF/IF11393 https://crsreports.congress.gov/product/pdf/IF/IF11393 From the last one: "Data on the percentage of buybacks that are leveraged are inconsistent. For example, the bank J.P. Morgan Chase reported that leveraged buybacks accounted for 14% of overall buybacks during 2018, which it said was the lowest percentage since 2009. But Yardeni Research, a respected securities market research firm, reported that they were 56% of the total."
  - xyzzy21 6y ago
    Strictly no. You need "free" zero interest money from the Fed! That's how MOST stock buy-backs are financed - it going onto the balance sheet as debt which someday will bite them. This is the shitty side of many modern CEOs. But the legal and tax incentives combined with Wall Street demands create the environment for it.
- imtringued 6y ago
  The only reason I dislike stock buybacks is that they encourage "riding" the bull market. Number goes up, people buy into the company, company does a stock buyback to keep the momentum, numbers go up even further, even more people buy into the stock, none of them caring about the actual company they are buying into, they just see the numbers. Dividends are boring, we need more boring companies doing boring productive work.
anonymouse008 6y ago
Replace option contracts with RSUs or a vesting cliff and see how closely that resembles the VC fiefdom
- pkdpic_y9k 6y ago
  this all sounds a lot like CEO talk to me...
SerLava 6y ago
I mean Just make a contract to pay them a decent amount of the company doesnt go tits up

sn41 6y ago

And so they go for stock buyback strategies. Reduce the supply, the stock skyrockets, cash in, leave.

MattGaiser 6y ago
You need profits for stock buybacks. Buybacks are just superior to dividends as a way to return capital.
- andromeduck 6y ago
  Dividends ought to not be at a tax disadvantage over capital gains for this reason.
  - MattGaiser 6y ago
    The problem is also unrealised gains vs realised ones. I don't pay any tax on the stock price increasing. I have to pay tax on dividends. If I don't need the money, I can just let it continue to grow tax free.
  - wrigby 6y ago
    Are they not? I thought qualified dividends (that is, dividends on stocks that have been held long enough to qualify for long-term capital gains) are taxed at the long-term capital gains rate.
    - freeone3000 6y ago
      You still have the one year of dividends taxed at the short-term rate, since dividends are taxed on disbursement whereas capital gains is only taxed on stock sale.
    - toast0 6y ago
      Dividends are taxable at the time of distribution; the price effects of a buyback are taxable when shares are sold [1], and delayed taxes are preferable to immediate taxes. [1] unless the holder has elected for trader tax treatment, in which case shares are marked to market at the end of the tax year
- hctaw 6y ago
  I think most criticism of buybacks would go away if we eliminated the capital gains tax and treated income equally regardless of where it comes from.
- hammock 6y ago
  >You need profits for stock buybacks. You merely need capital. Lots of buybacks are funded by debt
  - deleted 6y ago
    [deleted]
  - enos_feedler 6y ago
    This is pretty insane actually. Is there a common metric that captures which companies are funding buybacks with debt? or is it easy to figure out? I am not a finance person.
    - georgeecollins 6y ago
      If the long term debt increases during a period of buybacks, particularly more than net income, than yeah this is the case. And yes that happens. BTW, this is exactly what private equity companies do when they take a company private. They borrow a lot of money to buy the outstanding stock. Often the company they are buying with debt (held by the company) is not profitable. And sometimes the company goes bankrupt. So yes this happens.
    - sokoloff 6y ago
      With interest rates as low as they are (on both government backed and corporate investment grade bonds) and a reasonable forecast of higher inflation ahead, why shouldn't companies borrow for a variety of corporate activities, both operational and treasury?
      - imtringued 6y ago
        They should, and they should use the money to do the corporate activities you mentioned.
    - hammock 6y ago
      No. But it's generally common knowledge. Here are some articles https://fortune.com/2019/08/20/stock-buybacks-debt-financed/ https://fortune.com/2019/08/20/stock-buybacks-debt-financed/ https://www.cnbc.com/2019/07/29/buybacks-companies-increasingly-using-debt-to-repurchase-stocks.html https://www.cnbc.com/2019/07/29/buybacks-companies-increasin... https://crsreports.congress.gov/product/pdf/IF/IF11393 https://crsreports.congress.gov/product/pdf/IF/IF11393 From the last one: "Data on the percentage of buybacks that are leveraged are inconsistent. For example, the bank J.P. Morgan Chase reported that leveraged buybacks accounted for 14% of overall buybacks during 2018, which it said was the lowest percentage since 2009. But Yardeni Research, a respected securities market research firm, reported that they were 56% of the total."
- xyzzy21 6y ago
  Strictly no. You need "free" zero interest money from the Fed! That's how MOST stock buy-backs are financed - it going onto the balance sheet as debt which someday will bite them. This is the shitty side of many modern CEOs. But the legal and tax incentives combined with Wall Street demands create the environment for it.
imtringued 6y ago
The only reason I dislike stock buybacks is that they encourage "riding" the bull market. Number goes up, people buy into the company, company does a stock buyback to keep the momentum, numbers go up even further, even more people buy into the stock, none of them caring about the actual company they are buying into, they just see the numbers. Dividends are boring, we need more boring companies doing boring productive work.

anonymouse008 6y ago

Replace option contracts with RSUs or a vesting cliff and see how closely that resembles the VC fiefdom

pkdpic_y9k 6y ago
this all sounds a lot like CEO talk to me...

SerLava 6y ago

I mean Just make a contract to pay them a decent amount of the company doesnt go tits up