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Politics : Ask Michael Burke

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To: Simba who wrote (72151)	12/21/1999 9:52:00 AM
From: Mike M2	Read Replies (1) of 132070

Simba, I would add to Wayne's reply that in the short run share repurchases seem to be the fast route to maximizing shareholders wealth but it is not a good policy for the long term because that money could be used to invest in productive investments that could generate larger returns over the long run. Andrew Carnegie reinvested heavily into his steel business . If he had paid out more dividends to himself ( Carnegie was not public) he would have had less capacity to produce real wealth over the long run (steel) . Share repurchases make sense when a stock is historically cheap when valuations are at record highs it makes more economic sense to raise equity capital rather than dissipate it on share repurchases. the reason for this apparent paradox in corporate finance is the proliferation of employee stock options. The fast route to rising share prices is financial engineering but the effects are short lived. When all businesses behave the same way - financial engineering at the expense of productive investment there is a decline in economic activity and profits because one firms investment in productive capacity is a source of revenue for another firm. Mike

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