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September 29, 2006

Comments

Piyush

One possibility is that firms perceive their own stocks ( and the market in general) as significantly undervalued and therefore buying their own shares generates higher returns than investing in other opportunities. With market PE ratios quite low, this would make sense.

dearieme

Oh, I'd just assumed that it's intended to hold up stock prices, the better to allow the senior executives to pillage the shareholders.

chris

Sorry chaps, you're just deepening the puzzles. Why should senior executives be more willing to pillage shareholders than they were a few years ago?
And why have ordinary investors cottoned onto the under-pricing of stock? Wall St analysts are paid billions to spot under-pricings. Why haven't they done so?

Alex

High global liquidity and fancy financing on one side, shareholder value activism on the other. Which maximises the managers' freedom of action? If money is cheap and securitisation etc. reduce risk to the lender, and shareholders are generally bolshier, it's possible that debt financing is better from the point of view of managerial aims.

Piyush

Management could have a better idea of the intrinsic value of their companies than the market - hence undervaluing the businesses.

Markets do tend to do mark stocks down from time to time so that's not a huge issue.

Re: analysts, they may be paid billions but nothing suggests that they ever get markets right in aggregate. Individually, of course there must be people benefitting from undervaluation.
Of course - this is all a hypothesis !

dearieme

"Why should senior executives be more willing to pillage shareholders than they were a few years ago?" (1) Because people learn. They see that more and more outrageous pillaging is attempted, that it works, that it goes unpunished, so they try it too. We haven't reached an equilibrium yet. (2) Because they are all baby-boomers , or worse, now. All hope of self-restraint has gone, until a new generation emerges disgusted with the decadence of its elders.

james higham

There is definitely unease and this has also been reflected in Canada, according to major banks. The belts are ever so slightly tightening.

Michigan John

Chris:

Could it be that companies believe their stocks to be undervalued?

Also, regarding "why I blog," as you know, you have a knack for writing. You gotta write, man.

Piyush

One other explanation : In the US market , earnings yield ( inverse of P/E) has been higher than bond yields for most of the year and this is unusual. This means companies have an incentive to borrow money to buy stock or participate in takeovers which have also increased significantly.

Laurent GUERBY

What about tax optimization?

Dividends support two taxes, the one on profit, and then another one for the shareholder income tax.

How is accouting done for share buy-backs ? And accounting of debt taken to perform it ?

I have no information, but well, I'm suspicious of a very simple and common explanation :)

Maynard Handley

* Who benefits most from stock buybacks? Answer: excutives who can cash out options now, and can leave the company (and the dimmer shareholders) stuck with the debt that was used to purchase stocks.


* Why now, not a few years ago? Answer: because, try as they might to fight the tide, it appears that worldwide patience with stock options is running low. Better to grab as much cash as possible now rather than attempt some sort of long game. Sure, today it looks like the Bush administration will do anything CEOs want, but you never know --- Dems might win congress in 2006; GM might implode revealing Enron-style corruption; who knows what tomorrow may bring.

realestateglendaleca

One other explanation : In the US market , earnings yield ( inverse of P/E) has been higher than bond yields for most of the year and this is unusual. This means companies have an incentive to borrow money to buy stock or participate in takeovers which have also increased significantly.

Juno888

I would really love to know the truth as to whether or not they are gone! Does anyone know? I did enjoy the restaurant!

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