False. Companies will not retain the excess earnings for themselves if they have prospective projects with costs lower than their cost of capital.

Companies will keep cash for all sorts of reasons--

• Uncertainty of future cashflows/sporadic cashflows

• Cash for operations

• Satisfy the pecking order hypothesis

• Waiting for tax holidays

Reinvestment in capital projects is a reason too, but it's not the whole picture - even this list is far from that. As a matter of fact, right now there are record levels of cash being held in the privote sector - that's not being paid to shareholders.

And I'm pretty sure you meant returns lower than cost of capital.

If these opportunities do not exist in the current economy, the excess earnings will be returned to shareholders through dividends, share buybacks

Not true of growth stocks - see the case of Apple.

or debt reductions.

Equityholders don't get cash if debt is paid off with retained earnings - and this would be highly unusual. Most companies benefit from debt in one way or another at any rate, be it tax shields, equity dilution, or signalling.

If a company decided to simply hoard its excess earnings when attractive opportunities exist it would likely become a prime takeover target or be targeted by activist investors who are willing to deploy the firm's capital.

Ignoring that I don't follow what you mean by "deploy" a firm's capital, it would be far more likely that the CEO and BOD - who usually are majority shareholders - would cash out: pay massive special dividends to shareholders financed by selling the assets of the firm and declare bankruptcy. Debtholders get fucked by this, but it's hard to stop it from happening.

Even that is pretty unlikely. What's more probable is that the BOD would vote the CEO off, he rides a golden parachute while the board decides on a new King.