By James Saft
(Reuters) – Quarter-by-quarter management and a compensation-driven obsession with company share prices may be impairing the long-term prospects of U.S. stocks as executives live off of their companies’ seed corn rather than disappoint a market obsessed with short-term results.
U.S. corporations are holding a record $1.74 trillion in liquid assets, according to the Federal Reserve’s quarterly “flow of funds” report released on Thursday.
That’s up 16 percent since the end of the last recession in June 2009. A variety of explanations has been posited for this – ranging from fear of regulation to a reluctance to repatriate gains and pay taxes.
The tax argument may play a role, but to judge by foreign companies’ headlong drive to invest in the United States and by the healthy return on net worth earned by non-financial corporations in recent years, it is tough to blame Washington or even the economy for this one.
Economist Andrew Smithers, of asset allocation adviser Smithers & Co in London, says changes in corporate behavior are part of a secular change over two decades, driven by executive compensation practices and the bonus culture.