U.S. Corporations' Repatriation of Offshore Profits: Evidence from 2018 | Hacker News Reader

U.S. Corporations' Repatriation of Offshore Profits: Evidence from 2018

federalreserve.gov

52 pointsmyroon536 comments

Share buybacks increase the company share price because they decrease the pool of available shares.

Corporate Executives often derive a significant percentage of their total bonus earnings when the share price goes up, so they have a huge incentive to spend the money they repatriated on share buybacks to line their own pockets via large bonuses.

Another perspective: Share buyback moves the decision of paying taxes from the company to the investor (plus avoid double taxation). With dividends, the investor will always get taxed. With share buyback, the investor can decide if he wants to keep his shares and not get taxed; or sell (with a profitable appreciation) and pay capital gain taxes.

While it's true that share buybacks are a nice way to return value to shareholders compared to dividends from a tax perspective they also have little to do with a business's growth or improvements in profitability. On some level I'm surprised bonuses are tied to share price and not market cap.

> While it's true that share buybacks are a nice way to return value to shareholders compared to dividends from a tax perspective they also have little to do with a business's growth or improvements in profitability.

Dividends also "also have little to do with a business's growth or improvements in profitability."

At the end of the day, with either 'system', company management has decided that they cannot find internal uses for cash that give decent rates of return, and have decided to return the cash to shareholders.

But it seems to me only one system is 'vilified'. There's a lot of magical thinking that goes on around dividends:

* https://canadiancouchpotato.com/2011/01/18/debunking-dividen...

The purpose of public stock is pay out profit to shareholders. Buybacks are a method of achieving this. Infinite growth is a joke.

This is exactly the same as a dividend, but the benefit is shareholders can choose when to recognize profits rather than being forced to when given the dividend. The double-taxation of corporate taxes and dividend income has made this the far better choice.

One gives money to shareholders directly, the other indirectly by boosting the share price. There is nothing nefarious about this. If a company has free cash flow and can’t find a way to reinvest to grow faster than the standard rate of return, then it should be given back to shareholders to be reinvested in the economy more productively.

Have you seen executive bonus structures? I'm going to assume the compensation committee isn't stupid and has more than one metric and a metric that can't be gamed quite so easily.

Isn't there a very simple fix for that? Just tie the bonus to market cap.

Tie it to a combination of things, including sales and operating income growth, not just market cap (which can be artificially juiced by macro market circumstances floating the boat of mediocre companies).

"Just get Congress to pass term limits!"

>Corporate Executives often derive a significant percentage of their total bonus earnings when the share price goes up, so they have a huge incentive to

Doesn't that apply to any sort of action that returns earnings to shareholders? eg. if they paid out dividends instead of doing buybacks, executives would also benefit because they're shareholders.

Depends how is structured? Options for example don't earn dividends, so if you have options, you benefit from buybacks but not from dividends.

Share buybacks also decrease the company share price because the company has less money after the buyback.

which is why share buy backs and dividend payments are the exact same thing (except for the tax implications).

> Share buybacks also decrease the company share price

Share buybacks reduce shareholders’ equity and the book value of a company since cash is spent but no asset is gained to offset it. It also raises EPS, since the earnings don’t change but the number of shares (denominator) is lower.

This doesn’t necessarily translate into a lower price per share, the supply of shares is reduced and the company generally buys their shares back on the open market, and the volume of their buying is substantial.

> Balance of payments data show that U.S. firms repatriated $777 billion in 2018, roughly 78 percent of the estimated stock as of end-2017 of offshore cash holdings

This is good for the U.S. economy compared to leaving it overseas. Even if it goes into share buybacks, higher asset prices mean businesses can afford to raise capital more cheaply and asset holders (retirees) gain an influx of cash.

There's no real reason offshore cash holders would invest their excess cash. If they could do so profitably and sustainably then they would've sold bonds at insanely low rates already to fund those projects. Creating more jobs is not as simple as tossing more money at the problem.

“The analysis so far suggests that the strongest effect of repatriation was on share buybacks.”

Great.

If I were a shareholder I'd be happy!

Seems like people get upset about decisions like this because they don't understand how these actions work.

When everyone does it, you are just getting a market built on nothing that will fall even harder when times get tough. The CEO regularly cashes out their stock and the public and pensions get left holding the bag of empty pumped stock. This will happen repeatedly in the next decade.

What if you were a long-term shareholder?

The soon-extinct investor.

Not sure what the term has to do with it.

This is money the company doesn't know what to do with (otherwise they would have paid the tax consequences and used it as needed/desired), but now that there aren't tax consequences to repatriate it and return it to shareholders, they're returning it to shareholders.

Maybe some would prefer a dividend rather than a buyback; but ignoring taxes, they're equivalent in terms of value, and I can't ignore taxes. A dividend is a taxable event and a buyback isn't. I'd rather defer the taxes as much as possible.

It seems to me that buybacks reward those who've held the stock so far but want to exit their position, and managers who want a bigger bonus short-term.

In contrast, dividends reward investors who want to remain invested, but I don't know what incentive management would have unless they too are shareholders.

If I receive a dividend and don't use it to buy more shares, now I'm less invested in that stock. And I've got to pay tax.

If the company buys other people's shares, now I own (very marginally) more of the company.

I agree with your management incentives, although RSUs and options contracts can adjust for dividends.

Share buybacks and the rising valuation of of companies and real estate seems to make it pretty clear that big corporations and a lot of high wealth people have more money than they can invest into productive things like innovation and instead have to drive up the price of already existing assets.

Or that they would rather take the easy method to multiply their wealth instead of the hard work method?

Doing nothing is always easier than building something

The purpose of public stock is pay out profit to shareholders. Buybacks are a method of achieving this. Infinite growth is a joke

Say what you will about China, but it's really interesting seeing the huge contrast in the relationships both countries have with their large corporations. The USA does put effort to curb these types of efforts, but not enough imho.

I'm no historian, but I feel like there was a point where the USA just decided to throw its hands up in trying to regulate big companies. I wonder what needs to happen for the political tide to change.

Let's check back in 5 years? My guess is the complete uncertainty as to whether or not CCP will change the rules mid game completely destroying your business is going to bod well for future investment?

China is a corrupt authoritarian dictatorship. They are not someone that countries with the rule of law should try to emulate.

I recommend this book if you want an insider’s view of how China really operates:

Red Roulette: An Insider's Story of Wealth, Power, Corruption, and Vengeance in Today's China https://www.amazon.com/dp/1982156155/ref=cm_sw_r_cp_api_glt_...

To say that we operate on "the rule of law" is a little silly at this point in history, isn't it? We have corruption just as bad if not worse, only in the US we've legitimized more of it and driven it further under the proverbial rug.

Am I about to move to China? No. But let's not climb atop such a shaky pedestal.

To truly think that the rule of law in America and China are even remotely close, and that the average citizen is equally treated by the law in each country, is so absurd that you must be living in some sort of politics bubble, or simply have zero idea of how these country’s legal and political systems operate.

I'm curious, have you actually lived in China for an appreciable period of time yourself to come to this conclusion?

I don't really have any particular opinion on China either way, China definitely has done some bad stuff, but with regards to statements like: "and that the average citizen is equally treated by the law in each country" I'm curious.

Black Americans and White Americans, for example in the United States are treated very differently with regards to sentencing for very similar crimes. Would that contrast be the same as the one you say with Chinese vs. American?

China does not have the rule of law. This applies to all things including property. You can live your entire life in a house and have it seized arbitrarily without recourse. This is such a fundamental difference in life it’s hard to comprehend.

They aren't close; that's not what I was driving at.

China's problems and ours are leagues apart in terms of quality.

However, we do have a history of:

- assassinating and locking up political dissidents (see: Black Panthers. Yippies. Che.)

- selling out politics to elite private interests (see: congress)

- spying on our own citizens (see: COINTELPRO, snowden leaks et al)

It's a different flavor, but don't kid yourself; we suck real bad.

10 out of 10 times would rather be arrested in America and prosecuted in the American legal system than the Chinese one.

Here is an episode of TAL where someone describes their experience in Chinese prison https://www.thisamericanlife.org/448/adventure

America is an endless work in progress. But your view on it being some sort of hell hole is so warped I feel very bad for you. The mindset of living like that must be so depressing.

Given the rapid development of China, I think this phase of corruption would be gone relatively quick compared to the same phase in US history.

Xi Jinping also started a campaign for new type of state and business relationship

https://blogs.lse.ac.uk/cff/2020/11/23/state-business-relati...

http://www.ecns.cn/m/2016/03-06/201698.shtml

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