Abstract
During the period 2005-2014, S&P 500 firms distributed to shareholders more than $3.95 trillion via stock buybacks and $2.45 trillion via dividends — $6.4 trillion in total. These shareholder payouts amounted to over 93% of the firms' net income. Academics, corporate lawyers, asset managers, and politicians point to such shareholder-payout figures as compelling evidence that “short-termism and “quarterly capitalism are impairing firms' ability to invest, innovate, and provide good wages.We explain why S&P 500 shareholder-payout figures provide a misleadingly incomplete picture of corporate capital flows and the financial capacity of U.S. public firms. Most importantly, they fail to account for offsetting equity issuances by firms. We show that, taking into account issuances, net shareholder payouts by all U.S. public firms during the period 2005-2014 were in fact only about $2.50 trillion, or 33% of their net income. Moreover, much of these net shareholder payouts were offset by net debt issuances, and thus effectively recapitalizations rather than firm-shrinking distributions. After excluding marginal debt capital inflows, net shareholder payouts by public firms during the period 2005-2014 were only about 22% of their net income. In short, S&P 500 shareholder-payout figures are not indicative of actual capital flows in public firms, and thus cannot provide much basis for the claim that short-termism is starving public firms of needed capital. We also offer three other reasons why corporate capital flows are unlikely to pose a problem for the economy.A prior version of this paper was circulated under the title “Short-Termism and Shareholder Payouts: Getting Corporate Capital Flows Right.
Highlights
A fierce debate has been raging over whether shareholder-driven “short-termism”—that managers give up profitable long-term investments to increase the short-term stock price—is a critical problem for U.S public firms, their investors, and the nation’s economy
To estimate net shareholder payouts for public firms, we compute for each firm dividends paid and net equity issuances: Net Shareholder Payouts = Dividends − Net Equity Issuances where net equity issuances is defined as the dollar amount of direct and indirect share issuances minus the dollar amount of share repurchases
While tracing capital flows into private companies is difficult, we do know that capital circulates in the economy and that venture capital and private equity funds are raising more than $200 billion per year—a substantial fraction of the net shareholder payouts generated by all public firms—for investment in private firms (Prequin, 2018)
Summary
A fierce debate has been raging over whether shareholder-driven “short-termism” (or “quarterly capitalism”)—that managers give up profitable long-term investments to increase the short-term stock price—is a critical problem for U.S public firms, their investors, and the nation’s economy. The topics of these papers are far different; the former tests the pecking-order hypothesis and the latter tests asset-pricing theories These two papers do not, as we do, seek to classify the various types of issuances, measure total equity issuances, or estimate net shareholder payouts, either on a firm or market-level basis.
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