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I don't mean to take pot shots, but I picked up a few quibbles along the way. Touching just the more technical early paragraphs: Dividends, interest, and repur

I don't mean to take pot shots, but I picked up a few quibbles along the way. Touching just the more technical early paragraphs: Dividends, interest, and repurchases aren't the whole picture. Especially when funders are also insiders, a variety of other (sometimes "soft") benefits reward investment. Much corporate behavior studied in the vein of management conflicts of interest relates to executive compensation and other benefits that may or may not contribute to personal tax base. There is also the matter of trade in securities based on valuation, on public markets and otherwise, by investors of all stripes. Many listed companies have never paid a dividend and probably won't ever pay a dividend. S-1s for well subscribed IPOs often warn pro forma this will be the case. Companies may also adjust the amount and kind of risk they bear to align with one constituency at the expense of another (e.g. management over outsiders, well organized institutional investors over the masses). While leveraged buyouts are by no means dead, PE is far more than LBOs. The industry predates and has long outlived the 80s LBO boom. The term is a broad umbrella over many different kinds of operators leveraging (or suffering under) various features of our tax system. Debt and equity still enjoy different rights in liquidation, and contractual covenants and controls accompanying credit are different than rights assigned to equity holders by statute, governing documents, financing agreements, securities laws, and exchange rules. Like the time-remote possibility of dividends from a growth company, different spots in line to the coffer of a healthy operation still affect valuation. Derivatives and public markets can facilitate decoupling of control rights from equity. Instruments can be designed to blend equity and debt characteristics. But debt and equity still confer different rights to affect operations. It is difficult to speak of stock buybacks out of context; their use is varied, from purely financial to entirely structural. They are not entirely "unregulated", either. Background state corporate law, governing documents, exchange rules, and contracts (including debt documents) impose restrictions on when and how. The board is involved. Markets, public and private, may take note. It is also difficult to make tax arguments out of context. Even statements about the macroeconomic effects of certain policies have to turn on the prevalence and kinds of tax situations meaningful populations of companies inhabit. Tying the tax effect to rising executive compensation requires at least time-correlating tax policy changes to compensation. I'm not sure that's borne out. There are many additional confounding variables. Thanks for sharing your opinions. You've got some good back-and-forth started. Edit: Changed "bankruptcy-remote", which is a term of art in bankruptcy, to "healthy", which makes the point with less risk of confusion.

Animats 12y ago
I'm aware of many of those issues, but they're a bit much to explore in detail on Hacker Digest.
- wooter 12y ago
  Not trying to be a dick, but he pretty concisely and clearly proved your proposal to be unviable and relatively unsubstantiated. So the "bit much" would literally be the actual reasoning or if it has any empirical backing what-so-ever. We on "Hacker Digest" (actually curious, do some people call it that?) would kind of appreciate that.
  - Animats 12y ago
    I'm simplifying. If you want more detail, here it is. Much corporate behavior studied in the vein of management conflicts of interest relates to executive compensation and other benefits that may or may not contribute to personal tax base. Er, yes. Problems include "pay for volatility". If the CEO gets an option grant at market every year, and the stock price is flat, the option is worthless. If there's huge volatility, the option can be exercised at a peak, but is costless in a down year. McKinsey has a nice article on this: https://www.gsb.stanford.edu/sites/default/files/documents/mckinsey.article.2012_0.pdf https://www.gsb.stanford.edu/sites/default/files/documents/m... While leveraged buyouts are by no means dead, PE is far more than LBOs. The industry predates and has long outlived the 80s LBO boom. The term is a broad umbrella over many different kinds of operators leveraging (or suffering under) various features of our tax system. Seldom does "private equity" mean an actual cash purchase by a private party. There's usually debt involved, often taken on by the business being bought. There's also usually some tax gimmick involved. It's interesting how often a business turns around after going private, even with the same management team. See this article on Dell, a year after going private: http://www.cnbc.com/id/102026551 http://www.cnbc.com/id/102026551 Debt and equity still enjoy different rights in liquidation ... But debt and equity still confer different rights to affect operations. Yes, debt and equity are not the same thing. But they're a lot closer than they used to be. Here's a piece on startup financing, comparing convertible debt vs. preferred equity. (http://mintonlawgroup.com/?p=173 http://mintonlawgroup.com/?p=173) The classic property of debt is that there is a bounded upside; the best that could happen was that the creditor got their money back with interest. With convertible debt, if the company does well, or even just gets another round of funding, the loan can be converted to stock and the creditor can win big. If the company fails, as creditors they're ahead of all equity holders and maybe even general creditors. It's also not unusual for creditors to demand a seat or seats on the board, even if they don't have equity. It is difficult to speak of stock buybacks out of context; their use is varied, from purely financial to entirely structural. Yes, their use is varied. But about 87% of US corporate borrowing since 2009 is for stock buybacks or dividends. (http://www.washingtonpost.com/business/corporations-cant-stop-gobbling-up-their-own-stock/2014/05/09/83c8ddb0-d6e6-11e3-aae8-c2d44bd79778_story.html http://www.washingtonpost.com/business/corporations-cant-sto...). This reflects the low, low interest rates the Fed is offering. Equity to debt conversion is so tempting. It is also difficult to make tax arguments out of context. Most tax arguments for political campaign purposes are over tax rates over time. There's less public discussion over what is taxed at which rate. That, though, is what a sizable fraction of K Street lobbyists spend their time on. See "http://www.nytimes.com/2014/04/02/business/tax-lobby-works-to-defeat-overhaul-it-once-cheered.html" http://www.nytimes.com/2014/04/02/business/tax-lobby-works-t..., which notes, on tax breaks, "If you are not at the table, you are on the menu". Relative tax rates for alternatives drive many business decisions. Absolute rates, less so. Over the years, capital gains tax rates have gone up and down without affecting capital spending comparably. See "https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States" https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_Unite..., the graph for note 17. (I suspect I'm boring everyone to death at this point, so I'll stop.)

Animats 12y ago

I'm aware of many of those issues, but they're a bit much to explore in detail on Hacker Digest.

wooter 12y ago
Not trying to be a dick, but he pretty concisely and clearly proved your proposal to be unviable and relatively unsubstantiated. So the "bit much" would literally be the actual reasoning or if it has any empirical backing what-so-ever. We on "Hacker Digest" (actually curious, do some people call it that?) would kind of appreciate that.
- Animats 12y ago
  I'm simplifying. If you want more detail, here it is. Much corporate behavior studied in the vein of management conflicts of interest relates to executive compensation and other benefits that may or may not contribute to personal tax base. Er, yes. Problems include "pay for volatility". If the CEO gets an option grant at market every year, and the stock price is flat, the option is worthless. If there's huge volatility, the option can be exercised at a peak, but is costless in a down year. McKinsey has a nice article on this: https://www.gsb.stanford.edu/sites/default/files/documents/mckinsey.article.2012_0.pdf https://www.gsb.stanford.edu/sites/default/files/documents/m... While leveraged buyouts are by no means dead, PE is far more than LBOs. The industry predates and has long outlived the 80s LBO boom. The term is a broad umbrella over many different kinds of operators leveraging (or suffering under) various features of our tax system. Seldom does "private equity" mean an actual cash purchase by a private party. There's usually debt involved, often taken on by the business being bought. There's also usually some tax gimmick involved. It's interesting how often a business turns around after going private, even with the same management team. See this article on Dell, a year after going private: http://www.cnbc.com/id/102026551 http://www.cnbc.com/id/102026551 Debt and equity still enjoy different rights in liquidation ... But debt and equity still confer different rights to affect operations. Yes, debt and equity are not the same thing. But they're a lot closer than they used to be. Here's a piece on startup financing, comparing convertible debt vs. preferred equity. (http://mintonlawgroup.com/?p=173 http://mintonlawgroup.com/?p=173) The classic property of debt is that there is a bounded upside; the best that could happen was that the creditor got their money back with interest. With convertible debt, if the company does well, or even just gets another round of funding, the loan can be converted to stock and the creditor can win big. If the company fails, as creditors they're ahead of all equity holders and maybe even general creditors. It's also not unusual for creditors to demand a seat or seats on the board, even if they don't have equity. It is difficult to speak of stock buybacks out of context; their use is varied, from purely financial to entirely structural. Yes, their use is varied. But about 87% of US corporate borrowing since 2009 is for stock buybacks or dividends. (http://www.washingtonpost.com/business/corporations-cant-stop-gobbling-up-their-own-stock/2014/05/09/83c8ddb0-d6e6-11e3-aae8-c2d44bd79778_story.html http://www.washingtonpost.com/business/corporations-cant-sto...). This reflects the low, low interest rates the Fed is offering. Equity to debt conversion is so tempting. It is also difficult to make tax arguments out of context. Most tax arguments for political campaign purposes are over tax rates over time. There's less public discussion over what is taxed at which rate. That, though, is what a sizable fraction of K Street lobbyists spend their time on. See "http://www.nytimes.com/2014/04/02/business/tax-lobby-works-to-defeat-overhaul-it-once-cheered.html" http://www.nytimes.com/2014/04/02/business/tax-lobby-works-t..., which notes, on tax breaks, "If you are not at the table, you are on the menu". Relative tax rates for alternatives drive many business decisions. Absolute rates, less so. Over the years, capital gains tax rates have gone up and down without affecting capital spending comparably. See "https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States" https://en.wikipedia.org/wiki/Capital_gains_tax_in_the_Unite..., the graph for note 17. (I suspect I'm boring everyone to death at this point, so I'll stop.)