Scroll down to “All this would be well and good” to get to the meat of the argument.
The true insight is in the last paragraph, neatly jargon-ridden and incomplete:
Even if one imposes a fiduciary obligation on management to treat all shareholders equally, it’s not clear that management is betraying its trust by working to inflate share prices and creating opportunities for the savvy to cash out.
And who are the “savvy” in today’s world – why it’s upper management, of course, who are paid in stock options. They are not only informed about what’s going on, they influence it.
Even if the strategy harms future earning streams, it creates a valuable option that is ex ante available to all shareholders, and the option value of a firm is a real and often substantial component of its worth.
And who are the people dependent on the future of the enterprise? The salaried employees, the community, and (in the case of enterprises that are national assets) the country.
If markets are not efficient, it’s quite possible that maximizing current shareholder value is inconsistent with maximizing discounted infinite horizon profit streams, which leads one to question whether current shareholder value is a very useful metric of firm value from a social welfare perspective.
This is a fancy and indirect way of saying that stock buybacks are a way for upper management to enrich themselves by detaching the stock price from the fundamental value of a corporation, and by doing so they impoverish everybody and everything which is dependent on the future survival and prospering of the enterprise. Which is a large reason why the current financial inequality exists.
Edit: Actually, the author came out and said it in the comments section:
But even so, there is a deeper issue with buybacks, which is that to the degree the dynamic I describe does exist, the definition of a “good” firm as evaluated by informed investors is skewed. We want informed investors to value firms, but not based on their ability to offer enticing options to the swift in zero-sum games, but on their ability to produce profits by delivering goods and services. The stock-market casino has no purpose if “good” stocks are those that have better craps tables, with no underlying connection to the economic activity of the firm. As I say, I love informational investors and dislike free-riding by the proudly uninformed. But a stock market where the best profits are had by choosing firms that facilitate transfers rather than choosing firms that are valuable enterprises serves no social purpose.
And that is the stock market we have (or had) --EB
Nice analogy, perhaps the “Little guys” are at a disadvantage to some degree. We can still win, despite the supposedly well educated idiots that try to take advantage of the system and get rich quick schemes. Hope they don’t bump their plastic infused noses on the way down. I will stay the course I have planned. I still have an income due to self preservation, and working hard all my life. No tears to the fellows that did well at some point, and went went bottom up later. And asking now for bailouts because of bad decisions they made trying to game the system .Fuck em
Stock buy backs were illegal for many years and for a very good reason, then in 1982 Reagan and his bunch decided greed was good and it is for those at the top. It pure stock manipulation to enrich the CEOs and the upper management. They even do it with borrowed money.For the good of the business whether it is manufacturing or merchandising it is insane to borrow money to buy back shares. You are supposed to reinvest in your business and grow it not falsely increase your share price so you get a bigger bonus which is based on share price. The boards that approve this crap should be hung along with their greedy CEOs. They fleece the public and then beg for government handouts when it all comes crashing down. The airlines are a fine current example of this. Bankruptcy is where this should be handled not a taxpayer bailout
You probably noticed the post is from 2008. Waldman posted a link on twitter the other day is how I came across it.
I can’t really judge the post, did a quick skim of the Wikipedia article is where I’m at on stock buybacks.
It doesn’t even have to be devious to be a poor idea. The times when businesses tend to have lots of cash sloshing around is when the share prices are high. The buybacks tend to occur when markets are at or near their tops.
From the Wikipedia article:
Company executive compensation is often affected by share buybacks. Part of their rewards may be tied to their ability to meet earnings per share targets. Moreover, all share buybacks enhance the value of promised shares in their share incentive schemes.
Which is why upper management loves buybacks.
Bhargava reported that stock options exercised by top executives increase future share repurchases by U.S. firms. Higher share repurchases, in turn, significantly lowered the research and development expenditures that are important for raising productivity.
In other words, take the money and run.
Safeguards should be in place to ensure that decisions about share buybacks are not motivated by their effect on executive or managerial reward. Earnings per share targets need adjusting to take out the financial leveraging effect of the buyback and similarly share incentive schemes need adjusting to neutralize unwarranted enhancement.
The two phrases you will almost never hear in pro-buyback discussions are “opportunity cost” and “moral hazard.”
dont forget to add issuing shares as well…thats how the CEO gets paid ( just before a buy back)