Monetary Easing Explains the Coincidence of Leveraged Payouts and Lack of Real Investments

Viral Acharya
By Viral Acharya and Guillaume Plantin
The ultra-low US policy rates that followed the 2008 Global Crisis have been coincident with significantly large positive shareholder payouts by US firms, or in other words, negative net equity issuances, largely due to higher share buybacks (repurchases) than ever in the past. Net share repurchases and total shareholder payouts (the sum of net share repurchases and dividend payouts) have increased steadily since 2001 (in absolute terms as well as relative to assets), especially so in the past decade, reaching a peak of more than $800 billion in 2018. Over this period, fixed business investment growth has failed to keep pace with firm assets, leading to lower normalised investment despite cheap funding due to aggressive monetary easing and favorable tax reforms.

Several observers, policymakers, and politicians see a causal link between these two trends, whereby the increase in share buybacks inefficiently diverts internal corporate funds from profitable investment opportunities, thus leading to disappointing capital expenditures. This view has led to calls for a tight regulation of share buybacks. Taken at face value, the claim that payouts to shareholders have inefficiently crowded out aggregate corporate investment seems of little merit. Only an extremely poor governance across the board could lead US firms to forego value-creating investment opportunities and return cash to shareholders on aggregate instead.

Most recently, in the wake of the COVID-19 outbreak, former Federal Reserve Chair- man Janet Yellen has acknowledged that large debt burdens of non-financial corporations reflected excessive borrowing, much of which was not spent on productive investments, but rather used to distribute cash to shareholders, and that the Federal Reserve did not possess the adequate tools to regulate such use of leverage in response to low interest rates.

Read full VoxEU article.

Viral Acharya is the C.V. Starr Professor of Economics