Monetary Easing Explains the Coincidence of Leveraged Payouts and Lack of Real Investments
— July 22, 2020
By Viral Acharya and Guillaume Plantin
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.
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Viral Acharya is the C.V. Starr Professor of Economics