Sunday, February 6, 2011

The most profound lie in finance and economics

A profound lie is one that affects observable reality.  One that shapes social policy at both individual and collective decision-making levels.

Dividends do not matter is the most profound lie in finance.  From a shareholder perspective, higher dividend payouts are always preferable to lower dividend payouts with the caveat that the solvency of the enterprise is not threatened.  The obvious and simple reason this is true is that one of the choices the shareholder receiving that dividend can make is to reinvest it back into the company.  DRIP programs accomplish this reinvestment with minimal transaction costs.

The bedrock finance principle is that there is shareholder ambivalence between owning a company valued at $100 and owning say a $20 cash dividend and the remaining $80 company value.  The reason that this is false, is the ambivalence only holds if reinvesting the $20 back into the company is in the shareholder's opinion the absolute best use of those funds among the billions of alternatives.  A more detailed criticism previously posted.

The reason that this is a profound and pernicious lie is that the ambivalence of dividends together with small transactions costs and tax implications is used as an argument to not pay dividends by both academics and financial professionals.  Government through tax and other policies is a co-conspirator in creating the lie, which I will explain shortly.  Transaction costs are minimal and have come down significantly since the 1970s when the theory was "proven".  The tax costs of dividends, in Canada anyway, are only an  accelerated timing of tax payments.

For the financial professionals that sell stock offerings to the public, corporate executives are their clients and the confidence/gullibility of shareholders (and their money) are the product.  From an executive's perspective, having spent considerable effort obtaining shareholder money, there is natural acceptance of justifying alternatives to give any of it back, just as there is natural acceptance of receiving Ayn Rand's praise and glorification.  "Dividends don't matter" is the lie executives want to hear and repeat because it it is an excuse to never have to pay shareholders.  The docile, deluded, shareholder class will invoke cult heroes such as Buffett and Jobs as an excuse for the other 15000 US public companies not repaying shareholders.

To some, this might all seem like a very small issue or an irrelevant dispute between capitalists and corporatists.   There are profound social costs too, though.  First, if shareholding is a ponzi scheme that will never see adequate repayments to holding shares then there is an expectation of eventual collapse of financial markets.  Second, capital allocation to the most worthy investments is harmed by corporate hoarding of cash. Innovation and new project funding is less available.  Third, as of June 2010, US non-financial companies have in aggregate cash and liquid assets totalling $1.84 trillion.  Recirculating that cash in the economy would provide needed economic stimulus without indebting us all through government debt.  These are the simpler social value arguments.

A corporation does not have to pay dividends in cash.  A novel way would be to pay them with loans.  Natural finance queued soft loans provide ultimate cashflow flexibility for the corporation.  Beyond cash on hand, corporations could provide soft loans with say 2% accruing interest to shareholders in lieu of cash dividends while through their DRIP programs allow shareholders to trade the loans for more shares if that is what they prefer.  This satisfies the Modigliani–Miller ambivalence of dividends and shareholder fairness principles.  The main reason for using loans instead of or in addition to cash as dividends is the social value of reducing market capitalization of the corporation.  Reducing market capitalization of companies by issuing quickly repaid loans distributes more cash into the economy that can be used to fund the most productive ventures, and it shelters that capitalization from disappearing in the next crash.  This is a similar argument to the 3rd point in the last paragraph.  US market capitalization is approximately $50T.  But the additional argument is that transferring market capitalization to shareholders significantly reduces the risk to shareholders.  All companies eventually go bankrupt, and if a company always double downs instead of distributing profits and accumulated market value to shareholders, then the only hope to profit from shareholding is to find someone else to buy shares from you.  Shares that will eventually be worth 0, and without dividend payments will have returned 0 to the shareholder.

There is an unwritten argument in favour of shareholder acceptance of foregoing corporate repayments to them (while still clinging to delusion of future corporate repayments).  Monopolies and companies with government lobbying or other corporate power can make a case that reinvesting with them is more profitable than what most shareholders could do.  Monopolies or corporate legislative handouts may harm society, but it does not harm shareholders.  Repaying shareholders could also be used to fund competition to the monopoly.  Market and social corruption can thus be to the benefit of shareholders.  Reduction of market capitalization through large dividend distributions can mean less power to abuse the rest of society.  The strong government-corporate alliance which at least used to be considered dangerous and worth resisting, but which we now seem to have moved to dejected resigned acceptance, would be weakened by emptying corporate coffers and increasing corporate accountability to shareholders.  This is an unwritten argument because it is an "evil is good for some of you/us" argument.

While shareholder oppression may not be the greatest social injustice in this world, it is a key to unraveling other oppression.  There are laws protecting shareholder rights which are much stronger than those protecting the people.  If citizens can view themselves as equal shareholders of society's surplus (its tax revenue) then they can demand the same protections.

Government takes on the role of economic stewards with the encouragement and support of many.  A related broad mistaken belief is that companies that pay back investors harm the economy by taking away capital that could increase production (and create jobs).  Tax policies that favour common share investments over loans reinforce the outcome.  The truth is that all restrictions on financial flows harm the economy.  Too much capital tied up in corporations with few attractive projects would be better directed to consumption which can then improve the outlook of future projects.  The investor class receiving the financial flows likely has a propensity for further investments, improving capital allocation to needed projects, but even if they choose to set aside returns from investments for consumption, they can invest it back if offered higher incentives.  Increasing financial flows increases the velocity of money which directly increases the economy. Economic theories (schools) that focus on the primality of capital and investment for economic function are wrong due to false presumption that society operates at maximum investment capacity, and thus that further production depends on further capital, and that money cannot be quickly allocated (or even fabricated) to production.  Faster financial flows not only permits the proper capital levels, it distributes capital where it is needed most.

Tax policies that would encourage distributions to shareholders and promote loan investments include to put a maximum cash salary (or service contract compensation, including transfers to multinational affiliates) of 100k per year but allow compensation in securities above that.  Instead of taxing people's investment gains/losses on sale of securities, they should tax withdrawals from investment accounts.  Increasing corporate and personal tax rates, but making dividends tax deductible to the corporation would ensure that corporations often effectively pay 0 tax, but keep neutral tax revenue by getting more from individuals.  A small tax on market capitalization (or equity) would further encourage distributions to shareholders, as would heavy investment in shares by management.  Taxing dividends and capital gains the same as ordinary income would further balance lower risk loans as investment vehicles.

Public company executives abuse shareholders principally by being able to appoint their own (oversight) loyal board members.  Even if laws and procedures exist for shareholders to receive the payments they deserve (and those that benefit greater society), its simply often easier for shareholders to secede from the corporation (by selling shares) and find a more benevolent dictatorship.  Its easy because there are no other easy choices.

Natural finance provides investors with better, less risky, investment choices.  From corporate perspective, less risky investments means a lower cost of capital, and natural finance soft loans are also more flexible and less risky.  The only corporate downside being the loss in power to corrupt society and delude shareholders with a false hope of repayment.  Arguably, there is upside in affirming social responsibility.  For the social and economic steward role (of government), natural finance should be a national strategic initiative.  An easy alternative to choosing among lesser oppressors is needed for investors.  Natural finance only needs modest funding.


  1. Pascal, nice job once again with this post. You're right. Those that say dividends do not matter in finance is truly a giant lie. If you use any type of financial services analytics, such as this great offering from Modern Analytics, you would be able to easily see that dividends play a large part in generating increased revenues for any individual or organization, especially higher dividend payouts as you have mentioned. Generally, how this works is that the profit made from the dividend is immediately reinvested in the organization and that investment continues to grow quarter to quarter, year over year. Great post!

  2. This comment has been removed by a blog administrator.

  3. This comment has been removed by a blog administrator.

  4. I'm glad I found this web site, I couldn't find any knowledge on this matter prior to.Also operate a site and if you are ever interested in doing some visitor writing for me if possible feel free to let me know, im always look for people to check out my web services in Houston

  5. you write very well this article, i got good good information after read your effective writing style. i hope you will continue this good. Prize Bond Schedule

  6. At last but never the least, you can always go for Venture Capital and angel investors to fund your project.

  7. . Try not to mistake embellishment for lying. Youthful kids frequently misrepresent.

  8. Popular culture, like the television series Lie to Me, has fed and fueled the myth and fervor associated with being able to detect lying using nonverbal behavior. polygraph uk

  9. This blog is a piece of beauty, nothing else. Fell in love with this at the first sight.
    lie detector test united kingdom

  10. This comment has been removed by the author.

  11. The Certified Financial Planner Board of Standards, Inc (CFPBSI) characterizes financial arranging as "the way toward meeting your life objectives through the correct administration of your finances"

  12. So despite the fundamental refinements amongst finances and credit frame the hereditary chronicled perspective, credit seems, by all accounts, to be shaped from finances and speak to their change.

  13. If more people that write articles really concerned themselves with writing great content like you, more readers would be interested in their writings. Thank you for caring about your content. Lie Detector Test

  14. Very informative post! There is a lot of information here that can help any business get started with a successful social networking campaign. Lie Detector Test UK

  15. Bit Paradise (BPD) is a new, innovative form of cryptographic exchange station based on game meta. The Exchange transactions revenue utilized 100% by buyback and the returns from the game is distributed to the BPD holder by betcoin (Known as Chip coin). Now you can enjoy the benefits of returns from the game in BPD as like you have Casino stake

    BPD Trading Mining Rewards System

    Trade Mining is a compensation system in which users get back the transaction fees incurred when transaction was carried out, in form of BPD. The rewards system includes:

    Exchange transactions revenue, 100% of Buyback system + Game Income, 50% of Bet Coin dividend + Lotto / Jackpot operation
    After 100% of Exchange transactions revenue buyback than additional 50% of Game income dividend, 15% of Buyback, 5% of Lotto, 30% of exchange commission.
    Minimizing token value depreciation from stable dividend and buyback system.

    BPD (BitParadise Coin)

    Operating in form of equity coin by BPD’s exchange coin *More BPD coin, more BET coin dividend

    BET (Bet Coin)

    This is the coin that is used for all games in the exchange and 50% of the game income is paid to the BPD holder with BET coin. *Bet Coin is the stable coin that anyone can buy at the same price.

    The crowd sale starts from 15th April, 2019 and ends on 25th April, 2019

    Further Details:

    Official Website:
    Whitepaper: ... se_ENG.pdf


  16. How about we talk about the most spread meanings of credit. in the cutting edge distributions credit had all the earmarks of being "more fortunate", at that point finances.check my site

  17. I know this is one of the most meaningful information for me. And I'm animated reading your article. But should remark on some general things, the website style is perfect; the articles are great. Thanks for the ton of tangible and attainable help. financial news for today

  18. It is a fantastic post – immense clear and easy to understand. I am also holding out for the sharks too that made me laugh. Car Loan - Personal Loan

  19. i never know the use of adobe shadow until i saw this post. thank you for this! this is very helpful. national savings

  20. I read that Post and got it fine and informative.

  21. I think this is an informative post and it is very useful and knowledgeable. therefore, I would like to thank you for the efforts you have made in writing this article.

  22. Further sales may be on credit while purchases are on cash. So short term finance is needed to match these disequilibrium. finance

  23. Bank Overdraft: Bank overdraft is very widely used source of business finance. Under this client can draw certain sum of money over and above his original account balance. Thus it is easier for the businessman to meet short term unexpected expenses. finance

  24. Today, I was just browsing along and came upon your blog. Just wanted to say good blog and this article helped me a lot, due to which I have found exactly I was looking. KETQUAMOINHAT

  25. Thanks for the blog filled with so many information. Stopping by your blog helped me to get what I was looking for. Now my task has become as easy as ABC. Instant payday loans