Short-Termism and Capital Flows

Short-Termism and Capital Flows

Jesse Fried, Charles Wang

Series number :

Serial Number: 
342/2017

Date posted :

January 01 2017

Last revised :

February 11 2017
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Keywords

  • short-termism • 
  • quarterly capitalism • 
  • Corporate governance • 
  • Share Buybacks • 
  • open market repurchases • 
  • dividends • 
  • equity issuances • 
  • seasoned equity offerings • 
  • equity compensation • 
  • acquisitions • 
  • payout policy • 
  • capital flows • 
  • capital distribution

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."

Authors

Real name: 
Charles Wang
Harvard Business School