> Share buybacks allow companies to reward executives directly as their compensation is tied to stock price. If we started not doing that, the priorities might shift, but those executives like things the way they are.
This isn't right but it's adjacent.
Executives don't need buybacks to get whatever compensation. Their compensation is negotiated and you can write the contract to make it whatever.
However, paying dividends is a taxable event, which means shareholders don't like it. You have to pay the tax on the dividend immediately instead of when you sell the shares, even if you just use the money to buy more shares. Buybacks don't work like that unless you're the one who sells your shares in the buyback. Which you can be if you'd rather have the money immediately (and pay the tax) than de facto increase your holdings in the company.
If transferring money to shareholders as dividends forces them to realize taxable gains before they want to then they'd prefer the company keep the money and invest it in something internally instead. Buybacks give them away around that.
But that's not necessarily bad. The shareholders (the ones who sold their shares) get the money instead and then invest it in something else, ideally a different company so that the existing large company doesn't get even bigger.
Also, when the company keeps the money, it doesn't have to use it for R&D at all. Companies often use it to acquire other companies, which is the worst.
You don't really want a tax incentive to make big companies bigger.
I've been reading the Chernow biography of Rockefeller, and this simply isn't true. We've almost never enforced "anti-trust law", and it's basically never been particularly effective.
The Sherman Act was widely considered a failure (even after passage in 1890). It did little/nothing to affect the fate of Standard Oil, which actually grew for a decade after passage, to over 90% control of the market by 1904. This is despite the state of Ohio engaging in a much more successful legal attack, based on technicalities of the trust charter, having nothing to do with the federal law.
The thing that actually brought down Standard Oil was...competition. By the time the company was actually broken up in under the Sherman Act in 1911, it had declined to ~60% market share. The overall story is essentially the same as today: the law ends up being used to punish declining companies for prior bad behavior.
Laws mostly don't work by actually filing cases. They mostly work by deterring malicious activity because people don't want a case brought against them. The cases are only for the ones who fail to be deterred, which is pretty uncommon for large corporations because they can afford lawyers to tell them what not to do.
The problem comes when you erode what was meant to be a strong antitrust law through decades of narrowing interpretations and then it's not deterring them anymore.
> the law ends up being used to punish declining companies for prior bad behavior.
The solution to this one is to take the politicians out of it and allow customers to file antitrust class actions.
Chicago school assholes backed by economic-right postwar "think tanks" managed to radically shift our standard for "harm" in anti trust enforcement, back in the '70s, though a combo of lobbying and positioning their folks in the right places. The result was that it became nearly impossible to take anti-trust action. That's why it seems like we suddenly stopped enforcing it—we did. This was followed shortly by a shift way to the right by Democrats on economic issues (among other things—listen to Clinton in the '90s talk about crime or schools or lots of other topics some time, he sounds exactly like a Republican) after Reagan's landslide, which put any hope of reversing that bad course on hold indefinitely.
The first notable push-back on that state of affairs was Lina Khan under Biden, who ever so slightly course-corrected us back toward healthy market competition in the tiniest of ways, and every business bro reacted like she was committing mass murder. Meanwhile, we need that times ten for at least a decade just to get us back to something resembling functioning markets. At this point I doubt we'll see a shift back toward reasonable market regulation... ever. Plutocrat capture of the levers of power is so complete that the only way I expect the US to see serious anti-trust action ever again is as a tool of corruption.
> However, paying dividends is a taxable event, which means shareholders don't like it.
Shareholders love dividends because it is taxed as capital gains ( long-term capital gains if you own the stock longer than 1 year ). It's why most of the publicly listed stock ( of profitable companies ) pay dividends - because shareholders want dividends. Apple was forced to pay dividends by investors. So was Meta. As was Alphabet. All under shareholder pressure because dividends get tax as capital gains. Any company sitting on a pile of cash will get pressure to pay it out as dividends by shareholders.
Hm. Not quite right. Regular shareholders don't like dividends. It means you have an immediate tax liability so you are paying taxes twice. The company paid taxes, and now you have to pay taxes. Then that money has to be invested elsewhere eventually incurring another tax event.
It's much better to have the company buy shares back. That way the stock price goes up. You then only face the tax event once you sell the stock later in the future. So you just avoided a tax event.
The reason for dividends is that pension funds and the like do like dividends for whatever reasons.
Individual investors and people who have a long term approach like Warren Buffet are against dividends.
I like having a dividend. A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something. It also forces a certain discipline in the company, since shareholders don't like dividends getting cut. It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
> A company like NVDA forces shareholder returns to the whim of the market price, but dividends stabilize things because the stock is actually tangibly worth something.
All of the whims that go into the market price are still there. If you're a shareholder who doesn't care about the share price you're going to have a bad time.
> It also forces a certain discipline in the company, since shareholders don't like dividends getting cut.
Which usually leads to mismanagement more than anything because the company gets into a situation where they should lower the dividend but is under pressure not to and then starts eating their seed corn so they can still pay the dividend.
> It also limits empire-building, di-worsification, and "good ideas" that have questionable ROI.
This isn't right but it's adjacent.
Executives don't need buybacks to get whatever compensation. Their compensation is negotiated and you can write the contract to make it whatever.
However, paying dividends is a taxable event, which means shareholders don't like it. You have to pay the tax on the dividend immediately instead of when you sell the shares, even if you just use the money to buy more shares. Buybacks don't work like that unless you're the one who sells your shares in the buyback. Which you can be if you'd rather have the money immediately (and pay the tax) than de facto increase your holdings in the company.
If transferring money to shareholders as dividends forces them to realize taxable gains before they want to then they'd prefer the company keep the money and invest it in something internally instead. Buybacks give them away around that.
But that's not necessarily bad. The shareholders (the ones who sold their shares) get the money instead and then invest it in something else, ideally a different company so that the existing large company doesn't get even bigger.
Also, when the company keeps the money, it doesn't have to use it for R&D at all. Companies often use it to acquire other companies, which is the worst.
You don't really want a tax incentive to make big companies bigger.