Grandstand. A persistent thesis is that the large distributions of dividends and share buybacks that have been observed for a good decade are to the detriment of investment, and therefore of growth and employment.
This would be due to an abusive demand for profitability from shareholders, and in particular from investment funds, which make up a growing proportion of corporate shareholders. They would demand 12% output, we commonly hear, well beyond what any growing economy can reasonably produce.
Lame arguments
One of two things, then: either the company not achieving this return of 12%, the shareholder would go elsewhere and thus deprive it of funds to invest; either, to succeed in paying such a return, it would always pump more on its resources to the detriment of its investment, or would go into more debt at the expense of its future capacity to invest.
These arguments are actually flawed. They fall under what is known as the “composition fallacy”, ie taking the part (a particular company) for the whole (the whole economy).
Because if the company runs out of steam to distribute this money, it will lose market value. What the shareholder would gain with one hand by the cash he receives, he would lose with the other due to the depreciation of the shares he continues to hold. It does not matter, one will object, because the shareholder is short-termist, and prefers to have his money immediately to devote it to better opportunities.
If we accept this for a moment, a question immediately arises: where are these best opportunities? Where can the money go?
Contrary to reality
From an accounting point of view, there are only two possible destinations: either towards consumption or towards “real” investment. By “real investment”, we mean that the money must enter the company in the form of equity or debt securities, in order to be invested in it. A purely financial investment (buying back shares or housing for speculative purposes) is not an economy-wide option: you have to find a seller for these shares or for the house, and the seller also finds himself before the initial question: where to put my money?
Similarly, the bulk of “private equity” (investment in equity) or mergers and acquisitions do not bring new funds to companies taken as a whole; it is only a question of transfers of ownership of capital between investors.
You have 63.79% of this article left to read. The following is for subscribers only.