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Rating:Rekenthaler: Public Companies Aren't Reinvesting Not Rated 0.0 Email Routing List Email & Route  Print Print
Wednesday, July 17, 2013

Rekenthaler: Public Companies Aren't Reinvesting

News summary by MFWire's editors

Morningstar's John Rekenthaler dissects a working paper "Corporate Investment and Stock Market Listing: A Puzzle?" which found that private companies brought an average of 6.8 percent of assets back into their businesses every year, compared to 3.7 percent for public companies.

This is the opposite of what people are taught about public vs. private companies, Rekenthaler says. MBA students learn that CEOs of larger companies tend to waste money by overinvesting. Rekenthaler has a theory from Joan Farre-Mensa, one of the authors of the paper, that he sums up well:
Because those companies that underinvest enjoy slightly better quarterly performance (as their earnings rise by the amount of the foregone investments), and investors can see earnings but not the correct level of investment, the result is that the cheaters prosper. Companies that stint on investing are rewarded in the marketplace for their superior near-term results.
No where in the paper do the professors point out that these private companies fare better than public companies because of their reinvestment, so it's possible that the public companies are doing something right, Rekenthaler says.

Investor myopia may be explained by behavioral studies that show company managers make decisions based on meeting a consensus quarter-earnings estimate, even if forecasted a net present value.

To read the full story, click here

Edited by: Casey Quinlan


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