Thursday, January 17, 2019

The Serious Confusion About Corporate Buybacks and Other Corporate Share Transactions

Fritz Machlup
At the post, Socialist Alexandria Ocasio-Cortez Recommended for House Finance Committee, commenter Unknown Saver writes:
It is not enough that we have had 10 years of 0% interest rates, but now president Donald Dow Jones gave every corporation a tariff/deficit funded tax windfall to create jobs. What did most CEO's do? They enriched themselves with stock buy backs.

There is a lot to untangle here in this short comment.

First, the ramifications depend somewhat on how corporations held the funds overseas that they used in a buyback.

But beyond that, how a buyback impacts the stock market and economy is very complex. It depends on many different elements but, most importantly, it depends upon what the seller of the stock does with the money he receives from the buyback.

Further, if companies buy back stock and it boosts the price of the stock, it is a general incentive for other investors to invest in the stock market, thus, fueling capital investment.

But these are just two of over a hundred possible permutations.

The economist Fritz Machlup wrote a book about stock transactions, money raising etc., The Stock Market, Credit, and Capital Formation. He did so at a time he was attending the Mises Circle in Vienna. (He wrote it in 1929 and it was originally published in German in 1931. The English revised edition was originally published in 1940 when he became somewhat Keynesian.) He lists page after page of possible permutations. He didn't specifically address corporate buybacks but his permutations can easily be applied to buybacks.

I see that the paperback version of his book is listed on Amazon for $976.83. I own a copy:

Fortunately for some of you, there is a Kindle version for $2.80. 

Here is a glimpse at Chapter 3 (The notes and highlights are from my original reading of the book):

Here is a page where he discusses some permutations:

In total, he lists 115 different permutations.


1 comment:

  1. As a lover of physical books, I almost cried seeing your notations in your copy of the book (yes, I realize this is sometimes understandable before books become either old or expensive). By the way, there's a copy of the 1940 edition (hardcover) on Abebooks for less than $100. I think that Amazon price is another result of the use of competing algorithms.

    Don't lose hope, though. If you ever become as famous as Mises your notations won't destroy any hope of getting four figures for your book (as the situation stands today) but instead will add immense value to your copy.