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Corporate Diets: Some Fat Firms Just Need to Get Fit

Write-Off: The Tax Blog

Americans are notoriously obese. Whenever I travel outside the country I am reminded of how fat, on average, my countrymates are (including me!). What is the problem with being fat? There are tons of problems, of course. Some of the problems derive from simply carrying around too much weight, unproductive mass that puts strain on knees, hips, etc. Fat is extra, unproductive person, clinging to you, dragging you down, making you slower, and, in general, slowly killing you. What does this have to do with taxes, or corporations, or, anything relevant to this blog?

Some firms are simply a little too big. They have assets that are unproductive. These assets are bringing average returns for corporations down. These assets could be redeployed in new investments, but, these firms just don’t have any good investment opportunities available to them. So what is a fat firm to do? The responsible thing for an unfit, fat firm to do is to right-size itself, getting rid of unproductive assets so that what is left is leaner, more agile, higher-returning, and overall a better firm.

While I do like the idea of calling such a move a corporate diet, the process whereby firms that are too large slim down, it has another name: It’s a share repurchase, or, a share buyback. When firms that have been earning returns and generating cash have nothing better to do with cash, they can get rid of that unproductive asset, slim-down, and give it back to shareholders. It’s a corporate diet. There might be reasons to not like share repurchases (and for some, to tax them differently), but, its important to understanding that at the heart of this corporate behavior is just a flabby firm, yearning to be fit.

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