Wednesday, December 12, 2007

Alternative theory to stock buybacks as a cause of lower investment

I was surprised to read this in Rubin's An Uncertain World:
Pension funds became a driving force for short term thinking in corporate America. (p. 333) The [pension] contribution is a charge against earnings. But the better the performance of the stocks in the [pension] fund's portfolio, the smaller the company's annual contribution would have to be -- or perhaps no contribution would be needed at all. Earnings would this be higher, which would help raise the company's stock price. So, as companies were being evaluated more and more on their quarterly earnings, those companies began to began to focus more on the short-term performance of their own pension-fund portfolios. The very CEOs who complained about quarterly pressure were putting quarterly pressure ont their own money managers, who would in turn put pressure on the companies in whose stocks they were invested. The result was a cycle that was, depending on one's perspective, either virtuous or vicious. (p. 333)

I'm offering this as an alternative to stock buybacks as a possible cause for lower investment. I had originally commented here.

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