Using Cash to Repurchase Shares

Last week we highlighted a WSJ article on the growing cash balances at companies. We pointed out that in some cases the right thing for the company to do is return that cash to shareholders. The WSJ’s Real Time Economics blog reports today on Federal Reserve data showing increased share repurchases by companies.

Sadly, the blog worries that buying back shares “won’t lead to the kind of hiring the economy so desperately needs,” presumably because it means the companies are not investing in new capacity or other forms of expansion. But this confuses things. Just because a company is accumulating cash doesn’t mean it should be the one investing. A lot of good investments are to be made by new companies without cash, or by companies that suffered cash drains in the Great Recession. A signal element of a well functioning capital market is the ease with which cash is returned to shareholders to be reinvested where it is most needed.

Aggregate investment is still low right now, and the economy may be waiting a long time for sizable new hiring. But that is fundamentally driven by global economic forecasts. It won’t be helped by a mechanical focus on driving new investments specifically from the companies where the cash is piling up. That’s just a recipe for sclerosis. Given any forecast, we are liable to get greater new investments because cash is freely flowing back to investors where it can be channeled to the highest value new investments.

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