Sunday, November 24, 2019

Tyler Cowen Gets Stock Buybacks Right (Sort Of)

At Marginal Revolution, Tyler Cowen writes:
 I don’t see share buybacks as “draining” the economy of investment (the funds simply get recycled to other companies and ventures).
This is correct to a point.

There is also the possibility that share buybacks can result in money reverting to the consumer sector, if the stock bought back is bought from an individual who spends the money on consumer goods and there is nothing wrong with that. Shouldn't investors be allowed to cash out when they want?

But Bernie Sanders has recently attacked stock buybacks as somehow evil. He seems to view buybacks as just "enriching the rich." But this view can only be held by someone who doesn't understand the import role buybacks play in keeping capital markets functioning smoothly.

Buybacks are a way of driving a stock price higher if corporate officials believe a  company is undervalued relative to its true earning power or liquidation value.

Thus, a buyback is another way to provide incentives for investors to make capital investments through publicly traded stocks, since they know that a buyback is one way a company's stock can appreciate if the underlying value of a company climbs over time.

This is one more example of a socialist, Bernie Sanders, demonstrating shallow thinking and a lack of understanding about how markets work and provide incentives


1 comment:

  1. But aren't these companies using debt to do the buybacks? So less on R&D and more debt on the books.