Comment by OJFord | Hacker News Reader

Comment by OJFord | Hacker News Reader

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You do say it wouldn't work, but just to really spell out the obvious ones:

- no more options/shares for employees;

- significant insider buying/holding is generally considered a positive signal, alignment of incentives, etc. would need replacing with a more complicated compensation agreement linking bonuses to average share price over the year or something.

Slightly less obvious one is that you still have inside information on the index fund, not just that your company might itself be a significant constituent, but inside knowledge of the industry, what's happening to a common supplier, etc.

And by 'index fund' you probably actually mean/want 'significantly diverse pool of shares', an index can be small. Nothing (other than it being silly) stops it being just TSLA or whatever either, 'My Favourite 1' can be an index of my 1 favourite shares, and you can create a fund that tracks it. Obviously that's silly and doesn't happen to that extent, but it might if you incentivised it by making 'index fund' the rule.

at least consider a ban on stock buybacks like was the case until that regulation was rolled back in the 80s.

What why? Surely you mean stock buybacks in very specific scenarios such as after a bailout? Isn't it just the inverse operation of printing stock?

There's nothing really wrong with stock buybacks. They're just a tax efficient method for companies without strong growth opportunities to return value to shareholders.

Presumably GP is worried that (with the company's inside information about itself) there is a strong growth opportunity, as it will turn out, and that the company might decide to reissue once it's realised that growth.

Not saying I really agree, they typically offer a premium (which is just like rolling a dividend into it) and it would seem highly unusual to have a company that seemed growth/non-growth according to whether you had inside information.

I suppose there might be examples like AMC or GameStop (not that, inside information wouldn't have helped you there!) that seemed on the outside to be dying, they absolutely should return or value to shareholders and cease operations; but actually they had ambitious plans to revitalise etc...

> with the company's inside information about itself

a company acts in the interest of its shareholders.

If you're saying that a majority shareholder hides this info from the rest of the shareholders, triggers a buy back under a false pretense, then realize that growth (making the share worth more), then that's just financial fraud.

If a company has an opportunity for growth, this information is unlikely to be private to the shareholders, and thus, the buyback would price in that possibility (discounted by the success rate and risk). So the scenario, where a company buys back shares (from current shareholders), then somehow improves it's performance/growth suddenly, is not likely.

Yup, I did say I didn't agree, just laying out what I assumed was the thinking.

I think part the above person's complaint may stem from what happened a few years ago, which is that a decent number of businesses had their taxes reduced and simply used the extra money to do stock buybacks instead of improve or expand the company, increase pay, etc.

Now that said, stock buybacks on their own are not necessarily a "bad" thing, and if a company has no uses for a bunch of cash on hand then giving it to shareholders via buybacks can make sense rather than hold on to it. But I do think it's a fair complaint that if we're "giving" a company money in the form of tax breaks and they're using it to do stock buybacks (effectively saying they have no real use for it, as you mentioned) then it's unclear the tax breaks are actually useful to begin with. If they weren't allowed to use that money to do stock buybacks then they would have had to find some other use in the company for it (though in reality, since budgets are pretty flexible it wouldn't be too hard to get around that kind of requirement...)

Tax payers may very well object to that, but the shareholders (in that capacity) shouldn't.

Taxing corporate income is rather silly to begin with. It causes companies to engage in all sorts of pointless financial engineering just to avoid taxes without generating any value. This is a net drain on the economy.

A better approach would be to cut corporate income taxes to zero. But make it revenue neutral by increasing taxes on shareholders, bondholders, and highly paid employees.

One of the things that I think about with buybacks is sort of the 'second-degree' implications. The company is buying its equity, what are the parties selling doing with the money?

And so you delve into a subjective area. Part of me feels that there is a literal 'passing of the buck' where the company sort of dilutes and distributes sort of, societal investment responsibility, which is where even my own philosophy solicits an internal eyeroll.

The problem I have with buybacks is that I agree it is frequently a signal that 'a company has no uses for a bunch of cash on hand'. But does society suffer when businesses are so wed to capital efficiency? Does society benefit from corporate investment, period? Are earnest investments beneficial to society even if they don't work out?

Basically, how does the money distributed from buybacks impact society, and could that be improved?

> But does society suffer when businesses are so wed to capital efficiency? Does society benefit from corporate investment, period? Are earnest investments beneficial to society even if they don't work out?

I'm not sure if this is exactly what you're getting at, but I think there's an argument to be made that companies are a bit too comfortable with simply giving cash back to shareholders rather than using it to improve their position, I think effectively the interests of the company and the interests of the shareholders aren't aligned in this situation. When you give it to shareholders in the form of buybacks, there's no guarantee you'll ever be getting it back, and like we saw in 2020 the times you most want to have a lot of cash are the same times investors aren't really interested in buying your stock.

> Basically, how does the money distributed from buybacks impact society, and could that be improved?

This one is somewhat easier to answer, because the majority of stocks are owned by the wealthy (a quick google suggests the top 1% own 40% of stocks, and bottom 80% only own ~7% of stocks). How they then use that money is a different matter, which would depend on a lot of other stuff and the economy at the time.

… and what other methods of giving value to shareholders exists? Yes, pay them a dividend. Problem solved. Tax efficiency, you say, but all that means is that the state loses money. Sounds to me like the legalization of buybacks only served the shareholders, not society as a whole.

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