Home > Capital Allocation > Short-termism, quarterly capitalism and capital flows evidence

Short-termism, quarterly capitalism and capital flows evidence

Media and business analysts have recently identified stock buybacks and dividend increases as an empirical evidence that companies in the USA are not doing their best efforts to maximize value in the long-term.

Academia has also been recently debating on the effects of hedge fund activism-led short-termism and its effects. (1) Empirical evidence though is difficult to seize.

A more concise effort started with William Lazonick`s research “Profits without Prosperity”, who focused on stock buybacks and dividends as a decision by firms to allocate net profits away from investment, innovation, etc. Since then asset managers, institutions and usual activism critics have taken the buyback and dividend payment as an evidence that short-termism led by activists and a certain quarterly capitalism approach was depleting firms` coffers and inhibiting firms from investing, growing and creating jobs.

On January 2017, Fried and Wang have tried to fully depict capital flows so as to verify if coffers are actually depleted or not. (2) They argue information about buybacks and dividends is partial, and does not include other funds sources that would be offsetting them, (their study analyzes S&P 500 companies and beyond).

They take into account the following facts:

  • US companies execute huge equity issuances to cope with employee compensation, acquire assets or obtaining liquidity; this helps compound a value for Net Shareholder payouts, that represent 44% of Net Profits instead of 93% when Gross Shareholder Payouts are considered.
  • Big firms are when considered globally (as i their S&P 500 research) are Net Equity exporters to smaller firms, (where growth opportunities are higher). These outflows represent 16% of Net Profits and these amounts are really being channeled to investment activities. That means across all (big and smaller) public firms Net Shareholder payouts reached only 33% of Net Profits.
  • Part of the payouts are actually debt for equity substitutions, so that companies` assets are not really reduced, which leaves Net Shareholder payouts for all public firms at 22% of Net Profits.


Beyond the facts, some other reasons are provided by Fried and Wang to deny the bad face short-term activism is generally depicted:

First, Net Income does not represent Free Cash flow from operations and finance available for investment, as many “costs” really reflect investments, (R&D, for instance).

Second, investment opportunities could be seized by depleted firms if their financial capacity to issue stock remains. Even big Net payouts would not be so damaging in this case.

Also, payouts can be used by shareholders in non-public investments or IPOs, which is equally or even more productive.

In brief, Fried and Wang conclude that activism and short-termism may be damaging investment levels and the capital stock in our economies, but the evidence needs to be sought in different metrics and not in firm-shareholder capital flows.


a) Coffee, John C. and Palia, Darius, The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance (September 4, 2015). Columbia Law and Economics Working Paper No. 521. Available at SSRN: https://ssrn.com/abstract=2656325 or http://dx.doi.org/10.2139/ssrn.2656325 ,

b) Aspen Institute (2009). Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management. https://www.aspeninstitute.org/publications/overcoming-short-termism-call-more-responsible-approach-investment-business-management/

c) Bebchuk, Lucian A., The Myth that Insulating Boards Serves Long-Term Value (September 2013). Columbia Law Review, Vol. 113, No. 6, pp. 1637-1694, October 2013; Harvard Law School John M. Olin Center Discussion Paper No. 755. Available at SSRN: https://ssrn.com/abstract=2248111

2 Fried, Jesse M. and Wang, Charles C. Y., Short-Termism and Shareholder Payouts: Getting Corporate Capital Flows Right (January 8, 2017). Harvard Business School Accounting & Management Unit Working Paper No. 17-062. Available at SSRN: https://ssrn.com/abstract=2895161

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