no bubble

Doug Henwood dhenwood at
Wed Apr 12 11:06:50 PDT 2000

JW Mason wrote:

>What do you think? Is the current payout ratio unsustainable? Net stock
>purchases do seem to have been dropping pretty rapidly over the last few
>quarters. But if borrowing to fund share buybacks is unsustainable, why are
>companies doing it? It's hard to blame Abby Joseph Cohen for this one.

One of the main motivations seems to be to come up with the shares to feed options programs. We've got a weird agency problem going here - the shareholders like the high payouts and buybacks, and now managers are major shareholders. This seems like a new variant on the old Jensen problem, but instead of wasting corporate money on managerial perks, they're wasting it on buybacks, but here the managers' and shareholders' interests are aligned rather than in Jensenian conflict.

The point of the Liang/Sharpe paper <> is that to sustain the current level of dividends and buybacks, firms will have to devote 90% of their profits to the pursuit. That's not possible, unless corporate America plans to liquidate itself, which is an idea not without its appeal.


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