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Comment by __blockcipher__ | Hacker News Reader

Once a company has no need for more cash, there is no point to sell shares. The whole point of a IPO is to fund growth / give founders and early employees a payout.

Share buybacks aren’t about propping up the price (when done correctly). They’re about tax efficiently increasing your ownership share. Or you can think of it as paying money now to reduce the amount you need to pay in dividends, all else equal.

Share repurchasing is just a tax efficient way to return money to shareholders. People love dividends yet look at buybacks as insane. Why?

* Note: buying back shares when your company is overvalued is insanity. I’m not endorsing that. But if you’re in a situation like AAPL, they are hands down the correct move.

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Because it's difficult to distinguish between executive leadership trying to efficiently return money to shareholders vs propping up the share price so that they see a personal benefit via their own shares increasing or via contractual bonuses.

Given that there's an incentive to spend other peoples money(shareholders who bought shares) to increase their own(via bonuses, salary, or granted shares) it's fairly safe to assume that execs are following the incentive

“Spend other people’s money” is a really weird way to put it IMO - people chose to invest in the company because they thought it was a good investment. Investors would rather have the stock than the cash they paid for it. When the company does a buyback, the shareholder investment in the company becomes more concentrated. Each share represents more stock and less cash, making it possible to construct a higher-equity lower-cash portfolio. This more purely fulfills the investor’s revealed preference of owning the stock. If they change their mind, they can always sell.

I'd agree that it would be a weird way to put it if both sides had the same level of information. In this case execs okaying the buybacks have access to more accurate and immediate information than the potential investors and they have a way to funnel that investor money into their own pockets. In this situation I stand by characterization of this

> via their own shares increasing

This isn't any more true for the executives than any other shareholder, and doesn't really work that way anyway. Buybacks don't increase the value of shares unless the company was undervalued or making less efficient use of the cash than their other capital, and in that case they're smart to have done it.

> via contractual bonuses

The way to solve this is to do accounting for buybacks (and, for that matter, dividends) when calculating bonuses. You obviously don't want to have executives choosing whether to do these things based on that, so don't.

>Buybacks don't increase the value of shares

There was a price at the current supply and demand. Buybacks increase the demand which increases the price. The buybacks may be a bad idea and lower the demand from the marketplace but that information takes more time to disseminate and is harder to actually determine where as someone buying up millions of shares is a piece of information that is immediatley known.

>You obviously don't want to have executives choosing whether to do these things based on that, so don't.

That is what people who have problems with buybacks but not dividends, would like to see happen

> There was a price at the current supply and demand. Buybacks increase the demand which increases the price.

The company has a value. If the P/E ratio gets worse because the share price went up with the same earnings, more investors will find it profitable to cash out and invest in something with a better ROI. That doesn't happen instantly, but it happens quickly, because cash-flush investment banks realize they can front-run the correction for a profit, which makes it happen.

But the buyback itself often actually improves the ROI of the company and legitimately makes it worth more, because the company itself was getting high returns on its productive capital and low returns on its cash, and now less of its share value is represented by the low productivity cash.

> That is what people who have problems with buybacks but not dividends, would like to see happen

Except that then the perverse incentive for managers becomes to boost the stock price by not issuing dividends, since dividends reduce the stock price. The only real way to fix it is to fix their incentives, and once you do that you're back to preferring buybacks due to the tax treatment.

Doesn’t apply if the incentives are structured based on market cap, not per-share price.

Issuing shares is borrowing money.

Buying back shares is repaying that money.

It's a good thing that companies can repay the money they have borrowed, and a good thing that they are doing it.

If companies were throwing off dividends exceeding their collective earnings, wouldn’t you be concerned?

Not if they've been sitting on a pile of cash for years and doing nothing with it. What are they supposed to do with money they don't need? Store it in a mattress forever?

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