Maximization of Shareholder Value: Flawed Thinking That Threatens Our Economic Future
One of the most widely promulgated falsehoods in investing is the notion that those managing publicly held companies are obligated to maximize shareholder value. In recent years, US companies have taken on record amounts of debt to fund share repurchases on a scale only exceeded in 2007, in the name of enhancing shareholder value.* Often undertaken at the behest of a vocal minority, these buybacks have served to enrich CEOs at the expense of other important stakeholders, diminish the health of our economy, and threaten the long-term future of our corporations. That there is no legal basis for this fixation on shareholder value is either poorly understood or conveniently ignored by much of the investing public. Thankfully, the doctrine of shareholder primacy is now being challenged with more vigor and frequency than ever before. It’s time to put to rest an idea that too often promotes myopic thinking and imperils long-term value creation.
Many observers trace the rise of shareholder primacy theory to the influence of economist Milton Friedman. In 1970, Friedman argued that the social responsibility of business is to increase profits. Six years later, in “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” academics Michael C. Jensen and William H. Meckling turned to agency theory to explain why it was the sole obligation of corporations to maximize profits. They posited that corporate executives acted as agents for the owners of the business, the principals. Maximizing shareholder value became a shared goal that served to align the interests of shareowners and management, the latter via generous incentive compensation plans.
What got lost along the way was that the goal of maximizing shareholder value has no foundation in US corporate law. Directors and officers of publicly held companies have general duties of loyalty and care to the corporations they serve, but not to shareholders of the firm. Lynn Stout, professor of corporate and business law at Cornell Law School, notes in The Shareholder Value Myth that “maximizing shareholder value is not a managerial obligation, it is a managerial choice.” Only during takeovers and in bankruptcy does US law give special consideration to common stockholders. Importantly, Stout also points out that shareholders are hardly monolithic. Hedge fund manager Carl Icahn has a different time horizon, risk tolerance, and objectives than the typical pension fund. Stout likens strategies to unlock shareholder value to “fishing with dynamite.” That is, short-term success is often at the expense of “aggregate shareholder wealth over the long term.”
The bull market that began in 1982 helped fuel a hostile-takeover boom, and corporate raiders commonly invoked the noble ideal of maximizing shareholder value as they sought leveraged buyouts, greenmail, spinoffs, and asset sales. The classic book Barbarians at the Gate: The Fall of RJR Nabisco is a fair depiction of the times. Today’s corporate raiders are called activist investors, and while the tools at their disposal may have changed, their motives are similar, and the recent surge in share repurchases suggests that CEOs are heeding their call. The result has been a buyback binge of epic proportions, almost certainly violating one of Warren Buffett’s cardinal rules of investing. In his 2011 letter to Berkshire Hathaway shareholders, Buffett said:
Charlie [Munger] and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.
We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions — even serious ones — are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted.
There’s little doubt that capital used to fund many buybacks over the past decade has been diverted from more worthwhile investments. As a result, innovation has suffered, crimping growth, and other important stakeholders, particularly employees, have been left behind. This is the argument put forth by William Lazonick, professor of economics at the University of Massachusetts Lowell, in “Profits Without Prosperity.” He notes that since the late 1970s, companies have migrated from a “retain-and-reinvest” approach to a “downsize-and-distribute” philosophy, resulting in chronic short-termism and accompanying social costs in the form of “employment instability and income inequality.”
Lazonick points the finger at stock-based executive incentive plans, buybacks run amok, and poor oversight on the part of corporate boards. CEOs at S&P 500 firms now have a majority of their pay tied to their firm’s stock price, which may explain the record $270 billion spent on buybacks in the first half of this year. In fairness, Lazonick distinguishes between good and bad share repurchases. He acknowledges that tender offers can be a viable strategy for buying back undervalued shares at a designated stock price, according to the precepts of Buffett. However, he considers most open-market purchases ill-advised and undisciplined, noting that companies have a track record of buying at inflated prices.
Lazonick boldly proposes reforming the system by disallowing open-market share buybacks; curbing stock-based pay and tying compensation to innovation; and giving board seats to taxpayers and workers. While his call for reform is likely to meet stiff resistance, Lazonick should be applauded for drawing attention to a critically important issue.
Rather than enriching themselves by buying back stock at prices near all-time highs, CEOs should instead reinvest in their businesses, including their employees. Doing so will drive long-term growth and sustainability for corporations and the economy at large, better balancing the interests of all stakeholders.
*An earlier version of this blog post characterized the scale of share repurchases as “unprecedented.”
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42 thoughts on “Maximization of Shareholder Value: Flawed Thinking That Threatens Our Economic Future”
I used to own a small business so at that time I was a CEO and a shareholder rolled into one so both interests were aligned.
Now I am a consultant to larger organizations where the CEO and the shareholders are different, creating what they call the “Principal Agent Problem”.
Over the years I have followed the debate you describe so elegantly with interest as I have seen it from a number of perspectives.
I firmly believe that the only role of the CEO, his management team, and the Board should be to maximize shareholder value.
What is missing is for shareholders to ensure that the CEO and the Board of Directors are acting in their best interest, and not in the CEO’s best interest.
Best interest has many definitions which should be defined by the shareholders, ranging from growing the top line, improving the bottom line, and if that is what they need, buying back shares, or even going private.
Shareholders need to manage the CEO who in turn needs to manage the company on behalf of the shareholders.
Speaking of activist investors – lord knows we need more of them, particularly in Canada where I live where the old boys clubs need to be retired – see the excellent example of CP Rail and Bill Ackman.
I think that trying to make a profit should be a good thing for any business, and investors in those businesses should make a profit from their shares.
Best wishes and thanks for reigniting the debate
Thanks for providing your perspective, Savio. I agree with you completely.
Your argument is silly, David.
I’m guessing you’ve been reading Steven Pearlstein’s columns touting the work of Lynn Stout and William Lazonick. They’re silly, too, and I’ve written to him saying so.
The problems are that (1) you fundamentally miss the point of the shareholder value argument, (2) you ignore the conclusions of literally thousands of empirical studies of corporate behavior, and (3) you misrepresent the lesson of the 1970s.
(1) The argument in favor of shareholder value is not that corporate managers should maximize shareholder value even if it’s bad for the corporation and the broader society/economy: it’s that truly maximizing shareholder value means taking actions that are BEST for the corporation AND the broader society/economy. That’s why Lynn Stout’s work on the legal basis for maximizing shareholder value is silly: she writes that maximizing shareholder value comes at the expense of “aggregate shareholder wealth over the long term”–but those are exactly the same thing.
(2) Lazonick’s thinking is equally silly, because he assumes that corporate managers would make investments to benefit the corporation if only the money weren’t diverted to pay dividends. There are two problems with this argument:
(a) What’s going on now is that corporate managers don’t believe that genuinely good investments are available, so they have come to the conclusion that the only use of the cash that benefits the corporation is to do stock repurchases. If they’re wrong, then the problem is that corporations are being run by people who don’t see the good investments available to them. But the presumption should be that they are in the best position to understand the value of each possible investment–especially to the extent that their actions are subject to capital market discipline–so you and Lazonick need to start providing some evidence that they’re wrong. And simply claiming “there’s little doubt that capital used to fund many buybacks over the past decade has been diverted from more worthwhile investments” does not count as providing evidence!
(b) Michael Jensen’s seminal 1986 article “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers” has now been cited more than 16,000 times according to Google Scholar. The basic finding, which has been supported again and again empirically, is that corporate managers tend to waste available cash by spending it on projects that benefit themselves but that are poor investments. What we as society want is to take cash out of the hands of those people. Jensen talked about doing it through dividend payments, and that’s a good idea; the problem is that corporate tax law provides an incentive for doing it through stock repurchases instead–but the point is that both ways accomplish the main task, which is to get cash away from people who are likely to do stupid things with it.
(3) What happened in the 1970s was that corporations hadn’t distributed cash–through either dividend payments or stock repurchases–and instead had made exactly the kind of bad investments that Jensen warned about, building unwieldy conglomerates that served mainly to increase the pay of CEOs because their compensation was tied to the size of the corporation rather than its performance. The LBO boom was about taking apart those stupidly constructed conglomerates so that each piece could be run by someone capable of running it well, with each piece subject to more effective capital market discipline. We don’t want to go back to those days.
There’s nothing wrong with saying that corporate CEOs are doing a bad job (witness, for example, the decision by IAC to put Chelsea Clinton on its Board of Directors–a favor to Barry Diller, but not in the interests of good corporate governance); there’s also nothing wrong with saying that LBO managers are doing a bad job; and there’s nothing wrong with saying that activist investors want to make money with short-term actions at the expense of long-term investors. But it’s silly to argue that one of the actions taken to maximize shareholder value–getting rid of cash because the only available investments are stupid ones–is bad for corporations or society.
Kudos to the author for discussing this complex question.
I came to this blog via google because I was curious about CFA exam questions on share repurchases. On another website I found a reference to the CFA Program Curriculum (2015), Volume 4, page 128, question 38.f.: “explain why a cash dividend and a share repurchase of the same amount are equivalent in terms of the effect on shareholders’ wealth, all else being equal.”
Whenever people in finance write “all else being equal”, that alone tells me they have no valid scientific arguments for their claims. If finance professors were properly trained in deductive reasoning and basic algebra, calculus and probability theory they should realize that share repurchases and dividends are NOT equivalent. The proper math is outlined here:
Oops, I meant to post this as a general comment to the blog-post.
Thanks for your contribution, Magnus.
One good empirical study of the motivations for, and responses to, share repurchase programs is by Grullon & Michaely and is available at http://forum.johnson.cornell.edu/faculty/michaely/the%20information%20content%20of%20share%20repurchase%20programs.pdf. Among other conclusions, the authors find that “repurchases and dividends are motivated by similar factors. When future investment opportunities are contracting, an increase in cash payouts conveys important information about management commitment to reduce the agency costs of free cash flow when those costs are potentially more pronounced.”
your arguments are very good but too long , be brief, Brad Case
I think you are the one being silly. You said, “truly maximizing shareholder value means taking actions that are BEST for the corporation AND the broader society/economy.”
Defense stocks are up, maximizing shareholder value in defense sector means lobbying for wars, is that in the best interest of US economy and society? But isn’t that what the defense sector has been doing?
Reader Milton Friedman again (who is also referred to in the article by the writer) There is no broader society/economy in Friedman’s post.
You can maximize shareholder value in a world in which there are no externalities. Wherever that world is, it is not on earth!
Sharoon, I don’t know what you mean by reading Milton Friedman’s post: Friedman died in 2006, and if posted a blog on this topic I haven’t heard of it.
More importantly, it’s simply not true that “maximizing shareholder value in defense sector means lobbying for wars.” I won’t deny that lobbying can increase shareholder value (witness, for example, the effectiveness of Franklin Raines in lobbying the Clinton administration to relax constraints on Fannie Mae and Freddie Mac, which started the subprime mortgage crisis), but maximizing shareholder value goes far beyond lobbying: it means deploying capital in the most efficient ways–whether that is R&D investment, higher pay for certain categories of employees, lower pay for certain categories of employees, increasing the sales force, improving the budget process, paying dividends, or (yes) buying back shares.
Thank you for sharing your perspective and for your thoughtful comments.
I’m all for profits too and I agree that activist investors can be effective corporate watchdogs. At the same time, I think CEOs of public firms have an obligation to build sustainable enterprises, which requires looking beyond the next quarter. It’s hard to do that without investing in innovation and employees. I question the motivation and decision-making of management teams that choose to borrow money to fund share repurchases with their stock prices near all-time highs.
Dave, I think you’re missing Savio’s point. Any CEO who fails to look beyond the next quarter is NOT maximizing shareholder value. “Investing” in innovation and employees may be a good thing and it may be a bad thing, depending on what is meant by “investing.”
A CEO who can distinguish good “investments” from bad “investments” is one of the keys. If a stock buyback is a bad use of money (“investment”), then it shouldn’t be done; if it’s a good use of money (“investment”), then it should be done. The job of the investor, and of the equity analyst, is to figure out whether the CEO is doing well at distinguishing good uses of money from bad ones–which means maximizing the long-term value of the company (including its employees and its intellectual capital), not just quarterly earnings. If somebody is found to be sacrificing long-term value for the sake of short-term profits, that is not maximizing value to shareholders, and that CEO should be replaced.
Thanks for weighing in on this debate. If it’s true that “corporate managers tend to waste available cash by spending it on projects that benefit themselves but that are poor investments,” how is it that their preferred strategy of buying back shares, with borrowed money at record high prices, is not likely an equally poor investment?
And if the judgment of these corporate managers is indeed so poor, why should we accept the notion that the investments they are passing up are “stupid ones?” If the attractive investment opportunities for so many companies are so scarce that their best option is to borrow money to repurchase shares regardless of value, then our economy is worse off than I thought.
I can’t say that buying back shares is not an equally poor investment. You asserted, “There’s little doubt that capital used to fund many buybacks over the past decade has been diverted from more worthwhile investments,” and you cited William Lazonick’s argument that both share buybacks and dividends have “left very little for investments in productive capabilities or higher incomes for employees.” What I said is that, based on an enormous number of empirical studies conducted over the past 28 years, what CEOs do with money that they DON’T return to shareholders (either in the form of dividends or in the form of share buybacks) tends to be worse than distributing it–that is, exactly the opposite of your argument. That doesn’t mean you’re wrong: it’s possible that this is a particular example of a situation in which the best use of the money would be something other than returning it to shareholders. But you can’t just assert it: you have to offer some evidence that it’s actually true. It would be really, really great if you would provide empirical support for your argument. I don’t think you can.
Similarly, we shouldn’t simply “accept the notion that the investments they are passing up are stupid ones.” The essence of capital market discipline is that investors (and non-investors, including equity analysts) near-continuously pass judgment on whether corporate managers are doing a good job of distinguishing the good uses of money from the bad ones, and implementing the good ones. In fact, that’s exactly why your argument is silly: if repurchasing shares is actually a stupid use of money, then the value of each share will go down. That is, if additional R&D (or higher employee pay, or whatever else) would have been a better use of the money, then diverting it to repurchase shares will actually hurt corporate managers because a significant share of their compensation is tied to the value of an asset (company stock) that becomes worth less as a result of their stupidity.
Thank you for your kind response – I take the responsibility for not being clear in my comments – my sincere apologies.
A focus on making a corporation inherently valuable would, in my simple way of thinking, serve the interests of shareholders, and by extension society at large.
Brad raises an excellent point that I have seen first-hand – when there is excess cash lying around, pet projects surface and corporate governance flounders.
In a world that is changing rapidly I think a short term focus is not only a good thing but likely the only thing that is a justifiable use of cash, that rightly belongs back in shareholder pockets in the absence of justifiable alternatives.
I look forward to a day when Corporate Boards are not locker room friends of the CEO and there is more representation of shareholder’s interests at the table.
If there was one area that needs more regulatory oversight it would be the obligations of board members to shareholders, not to their pal, the CEO.
Savio, I want to clear up one point: from my perspective, a short-term focus is not the same as maximizing shareholder value. But otherwise I agree with you. Thanks.
Thank you – that was partly tongue in cheek and partly intended. Yes, point taken – the two are very different concepts and when left in the hands of management consultants like me can lead to surprising results, both pleasant and unpleasant.
I am pleased to see that you are an ardent advocate of maximizing shareholder value and firmly on the shareholder side – we need more folks like you, and to David’s point , also we need more focus on corporate governance at the board level, which I think is the fundamental problem behind CEO hanky panky.
I also very much liked your last response to Chris, in particular your elegant application of present value calculations – you would do well in the management consulting business-)
Best and thanks again
Thanks, Savio. Yes, I’m an enormous fan of capital market discipline in its many forms. One of the most important is distributing cash to investors–either as dividends or in the form of share repurchases–so as to get it away from people who might otherwise waste it. Another form of capital market discipline is attentive, independent, conscientious directors. Another is a robust community of equity analysts. Another is activist shareholders. Another is the threat of a takeover by private equity buyout funds. Another (perhaps surprisingly, to some) is corporate debt, because any corporate borrowing–whether through a public bond offering or through a private placement–subjects the company to the scrutiny of another set of lenders, and perhaps debt analysts as well. What I hate to see is a lack of capital market discipline: investors should expect to be taken advantage of if they simply “trust” managers to be looking out for them.
Who is “for” making a profit by private enterpirse? Surely, all of us who have commented on this story thus far. But who is “for” financial crisis of 2008-09? No one in his sane mind!
That’s the difference between “making a profit” and “maximizing shareholder wealth”. All kind of dubious things are justified using the pretext of shareholder wealth maximization. As soon as someone utters these words, you have to be on an alert for a con job. Good article!
I appreciate your point of view and think we are in agreement that CEOs can make poor decisions when it comes to deploying capital and that effective corporate governance is too often lacking.
Thanks again for sharing your thoughts.
Thank you for taking the time to respond and your patience in what has been a lively debate.
I generally read what you and Jason post as both of you have a knack for writing on subjects that are of interest to me.
This particular one and the various points of view have certainly helped me in thinking through the subject in more depth than I have in the past, and I am certain that some conclusions I have reached will help me in structuring agreements in my new venture.
I look forward to your next article and take this opportunity to wish you an enjoyable weekend
Thanks for visiting our blog and weighing in!
I think you’re wrong, Chris.
The value of any asset is equal to the entire future stream of income produced by that asset, with each future slug of income discounted to the present by the appropriate discount rate. “Maximizing shareholder value” means maximizing (the present discounted value of) the entire future stream of income. Maximizing the next quarter’s earnings is NOT the same thing as maximizing shareholder value. If a corporate manager sacrifices future earnings for a one-time bump in current earnings, the stock price should decline because that does not maximize shareholder value.
Here’s a good example: there is empirical research showing that corporate managers sometimes change discretionary items–either operating items like R&D and marketing expenses, or accounting items like depreciation and write-offs–in order to bump up their earnings temporarily, especially just before they retire (and especially if their pension depends on the accounting earnings just before they retire). And there’s empirical research showing that their company’s stock price declines when that happens, because at least some investors see through the charade.
That doesn’t mean corporate managers don’t make bad decisions–but it does mean that “maximizing shareholder value” is the same as making good decisions from a long-term perspective, not a short-term one.
I know what is DCF. Anyone who has ever studied finance knows it. No need to patronize anyone.
What some of us don’t know is that DCF is a “cause of” short term thinking. You can’t project cash flows deep in the future and those in the distant future are reduced to nothing due to discounting over the long term. And short-termism is a major, but not the only, part of the problem.
You should have paid more attention to Sharon when she pointed to negative externalities. It is rather naive to assume way externalities. Is it a coincidence that management of large companies polluting planet earth and denying climate change are firmly in the “SH wealth max” camp?
I’m sorry you thought I was being patronizing. I had no reason to think that you’ve studied finance. Also, I don’t know why you think I’ve “assumed away externalities.”
I made a fairly limited set of points. The first was that a great deal of empirical evidence suggests that corporate managers tend to make poor use of money that is left lying around, so distributing it–whether as dividends or in the form of stock repurchases–tends to prevent it from being wasted. The second was that Lynn Stout, William Lazonick, Steven Pearlstein, and David Larrabee fundamentally misunderstand the concept of maximizing shareholder value: they mischaracterize it as something like “pumping up the stock price at the expense of the health of the corporation.” My point is that damaging the health of the corporation generally causes the stock price to go down, not up.
I didn’t say that corporate managers are always right; in fact I said the opposite. I didn’t say that corporate managers don’t lobby for things that will benefit their corporation at the expense of the rest of society; in fact I said the opposite. And I didn’t say that we should assume away externalities; in fact I didn’t say anything at all about externalities.
Thanks for your kind words and for advancing the debate in such a positive fashion. Best of luck in your new venture.
thanks for the interesting article and the debate.
I think the issue here has more to do with semantics and bad habit than with economics and management.
Value and price are very different things which are generally confused in economics because of some theories about efficiency and rational-decision-making.
Most of the decisions which actually create shareholder value are generally referred to as “sustainable and/or long term”.
On the contrary what some directors intend to as ways to “maximize shareholder value”, have very little to do with value and most to do with stock price.
Maximization of shareholder value goes together with creating long term value and sustainability, and is opposite to inflating the stock price at the expenses of the firm itself. So, should the managers create shareholders value? absolutely so! This necessarily implies creating stakeholders value as well.
Regarding shares buybacks, the only problem with these, is that managers who go for such an option should be paid less, instead they generally end up earning more.
In fact shares buybacks are the result of only two possible conditions:
1) the CEO wasn’t able to find anything worthy investing in because he looked for in the wrong places;
2) the CEO wasn’t able to find anything worthy investing in because no such investment exists all over the world (this one is pretty unlikely but still not completely impossible).
In the first case (the very likely one), he should admit his faults, apologize and slash his salary or even leave.
In the second case he is however giving up on part of his duties as he’s gonna be less busy investing. Even if it’s not his fault and it’s due to force majeure, he should anyway be fair to the people who pay him and scale down his remuneration.
Thank you to Dave Larrabee for re-igniting this discussion and to Brad Case and others for some very thoughtful comments. Having taken several courses taught by Michael Jensen and, then, Dean William Meckling at the Simon School (then the University of Rochester’s Graduate School of Management), I learned the concept of maximizing stakeholder wealth and have used it as my tool for decision-making throughout my career. Therefore, I feel it incumbent upon me to add a couple comments to others on the topic.
They did not teach that it is the sole obligation of the executive team and Board to maximize shareholder value, which would imply a short-term focus on increasing stock price. Rather, they taught to maximize stakeholder wealth, which correctly is characterized by Brad Case to incorporate both the current value and the net present value of future discounted cash flows.
Here is another part of the model that requires attention. Stakeholder wealth incorporates more stakeholders than simply stockholders. They are one component, generally, but certainly not always, the most important component. Other stakeholders include employees, customers, suppliers, and the local and global community, and all should be weighed in determining what will maximize long-term stakeholder wealth. By employing this as my decision guidepost, I have increased stakeholder wealth on the order of a billion dollars throughout my career, and through my consulting with CEOs and Boards, I am always seeking to add to that.
Thanks for visiting our blog and for sharing your experience and wisdom.
I appreciate your point of view and think you’ve framed the debate well.
i think the shareholder value maximization is the best ideal idea i have ever read, it balances the short and long term goals, the missing part is the analysts understanding of the actions of the CEOs.
Aswath Damodaran has a terrific blog posting about share repurchases at http://aswathdamodaran.blogspot.com/2014/09/stock-buybacks-they-are-big-they-are.html. I saw it thanks to Tadas Viskanta’s posting at http://blogs.cfainstitute.org/investor/2014/10/07/undervalued-posts-from-the-financial-blogosphere/.
I was disappointed to see this in the first paragraph:
“In recent years, US companies have taken on record amounts of debt to fund share repurchases on an unprecedented scale in the name of enhancing shareholder value.”
This is simply not the case. Dividend yields + buybacks are well within the very long term range of returns to capital, which have tended to be more than 5% for the entire history of modern US equity markets. And, corporate debt to equity levels are very low.
Thanks for your note, Kevin. That’s very interesting, and some thing I didn’t know. Could you share your data, or a source for it?
Here is a post at my blog. The Damodaran post you referenced in an earlier comment was my jumping off point.
Here is a slide from JP Morgan on leverage (slide number 6):
Here is one of my posts discussing corporate leverage and interest rates, although the topic is admittedly speculative and contrarian:
Very, very interesting. Thanks for sharing.
Thanks for visiting our blog. On July 31, 2014, The Wall Street Journal reported, “U.S. companies simultaneously have issued record amounts of debt—both in nominal terms and as a percent of gross domestic product—and hold what appears to be record amounts of cash overseas.” As for the pace of stock buybacks, I stand corrected, and I will see that the post is amended. The pace of buybacks through the first half of 2014 was indeed exceeded in 2007, which of course marked the beginning of the end of an unfortunate era of financial stewardship.
Like Warren Buffett, I believe buybacks can be a prudent use of capital, but generally not when CEOs elect to repurchase their stock at record high prices. Long-term shareholders and other key stakeholders are ill-served by companies that prop up a stock through financial engineering at the expense of investing in sustainable growth initiatives.
For an example of just what I’m talking about I would suggest reading “The Truth Hidden by IBM’s Buybacks” in today’s New York Times: http://dealbook.nytimes.com/2014/10/20/the-truth-hidden-by-ibms-buybacks/?_php=true&_type=blogs&_r=0
Also, GMO’s James Montier just spoke at our European Investment Conference on this very same topic. You can view his presentation here: http://new.livestream.com/livecfa/EIC-Montier
Thanks for the links and the response. If I may, I do still think there are a couple of tricks to watch out for, though.
The measure of leverage I am using is debt to enterprise value. There are certainly other measures, and some of them will tell a different story. But, I don’t think the Wall Street Journal measure is useful. As they point out, some of the debt is related to tax arbitrage. Net debt would be more appropriate, I think.
But, even more importantly, that measure is comparing the global balance sheet of corporations to the national production level of the US. So, I think it is difficult to use that measure as a signal of leverage. Mostly, it is measuring the increasingly international footprint of US corporations.
Regarding the timing of buybacks, I think we need to be careful of hindsight bias. In a market with stochastic real properties, cash flows, forward projections, and capital deployment will tend to move together as opportunity ebbs and flows. In hindsight, this would look like herdish behavior even if it simply reflected real-time fluctuations in intrinsic values.