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Thread: How “Shareholder Value” is Killing Innovation

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    How “Shareholder Value” is Killing Innovation

    By William Lazonick

    JUL 31, 2017 | INNOVATION & INEQUALITY

    The prevailing stock market ideology enriches value extractors, not value creators

    Conventional wisdom holds that the primary function of the stock market is to raise cash that companies use to invest in productive capabilities. The conventional wisdom is wrong. Academic research on corporate finance shows that, compared with other sources of funds, stock markets in advanced countries have in fact been insignificant suppliers of capital to corporations. What, then, is their function? If we are to understand employment opportunity, income distribution, and productivity growth, we need an accurate analysis of the role of the stock market in the corporate economy.

    The insignificance of the stock market as a source of real investment capital exposes as fallacious the fundamental assumptions of the prevailing ideology that, for the sake of economic efficiency, a business corporation should be run to “maximize shareholder value” (MSV). As a rule, public shareholders do not invest in a corporation’s productive capabilities; they simply buy shares outstanding on the market, hoping to extract value that they have played no role in helping to create. And in practice, MSV advocates modes of corporate resource allocation that undermine innovative enterprise and result in unstable employment, inequitable incomes, and sagging productivity.

    The most obvious manifestations of the corporate misbehavior that MSV incentivizes are the lavish, stock-based incomes of top corporate executives and the massive distributions of corporate cash to shareholders in the form of stock buybacks, coming on top of already-ample dividends. Indeed, with stock-based pay incentivizing senior executives to do stock buybacks—i.e., having a company repurchase its own shares to give manipulative boosts to its stock price—over the past three decades the stock market has had a negative cash function. On the whole, U.S. business corporations fund the stock market, not vice versa.

    https://www.ineteconomics.org/perspe...ing-innovation

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    Galactic Ruler Spookycolt's Avatar
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    Who's conventional wisdom?

    I don't buy stock in the hopes of increasing a companies capital.

    I buy it to make a profit.

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    Junior Member Claudius the God's Avatar
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    Quote Originally Posted by Spookycolt View Post
    Who's conventional wisdom?

    I don't buy stock in the hopes of increasing a companies capital.

    I buy it to make a profit.
    You are a trader not an investor in the company. Once the company goes public, the trades become a matter between third parties and their trades have nothing to do with the operation of the company itself. In essence, the focus on shareholder value is more about the incomes and careers of the top executives and board members than it is the company. This all came to light during the Green Mail boom of the 80s, thanks Gorden Gecko and Ronnie.
    Thanks from labrea, chaos and Babba

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    Quote Originally Posted by Claudius the God View Post
    You are a trader not an investor in the company. Once the company goes public, the trades become a matter between third parties and their trades have nothing to do with the operation of the company itself. In essence, the focus on shareholder value is more about the incomes and careers of the top executives and board members than it is the company. This all came to light during the Green Mail boom of the 80s, thanks Gorden Gecko and Ronnie.
    Certainly to some degree, the speculation on the stock can obviously impact the company. Any stock held by the company can be sold at the speculative price, so the company can gain funding by selling any shares it holds after speculators and traders drive that price up on the open market. It could buy them back and do the same thing at any point.

    The whole thing is deeply imperfect, and so the theory behind it is pretty much useless. By the time a company is "worth" a hundred million, they may only have reaped 10 million through the sale of stock. Obviously some companies just blow up. If you create an iPhone you can be a $100 million company with only $10 million in initial capital, because the idea is so good and caught on so fast and they're selling like hotcakes. But most companies are going to have a hard time delivering on a stock that's priced 5 or 10 or 50 times above where it was issued.

    Obvious exceptions like financial institutions that manufacture profits through fraud and theft aside, of course....

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    Veteran Member bajisima's Avatar
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    Quote Originally Posted by Claudius the God View Post
    You are a trader not an investor in the company. Once the company goes public, the trades become a matter between third parties and their trades have nothing to do with the operation of the company itself. In essence, the focus on shareholder value is more about the incomes and careers of the top executives and board members than it is the company. This all came to light during the Green Mail boom of the 80s, thanks Gorden Gecko and Ronnie.
    True to an extent. But nowadays few have retirement plans anymore. They invest heavily in 401ks and hedge funds. So the execs continually tell the masses "if we don't do well you wont either." I have seen ordinary workers stare at screens to watch their 401ks either go up or down over this. So its no wonder it enters our psyche when we vote. For many Americans its all they will have when they retire outside of SS.

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    Swamper chaos's Avatar
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    What about the value of producers? Worker production has gone up dramatically over the last 40 years yet worker pay has stayed flat as the tax burden was shifted from corporations to the worker.

    Shareholders can and do inherit their shares (wealth) and pay next to nothing on capital gains. We hear republicans talk about tax reform that will result in a bigger burden on worker production simply because the democratic party does very little to represent workers.
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    Veteran Member bajisima's Avatar
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    Quote Originally Posted by chaos View Post
    What about the value of producers? Worker production has gone up dramatically over the last 40 years yet worker pay has stayed flat as the tax burden was shifted from corporations to the worker.

    Shareholders can and do inherit their shares (wealth) and pay next to nothing on capital gains. We hear republicans talk about tax reform that will result in a bigger burden on worker production simply because the democratic party does very little to represent workers.
    But that's been manipulated too. Many workers share in stock purchase programs, 401ks and bonus programs of stock. So when they hear "tax stocks" they freak out. Back when the middle class was prosperous, few average workers had stock. Instead they had actual retirement programs.
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    Quote Originally Posted by labrea View Post
    By William Lazonick

    JUL 31, 2017 | INNOVATION & INEQUALITY

    The prevailing stock market ideology enriches value extractors, not value creators

    Conventional wisdom holds that the primary function of the stock market is to raise cash that companies use to invest in productive capabilities. The conventional wisdom is wrong. Academic research on corporate finance shows that, compared with other sources of funds, stock markets in advanced countries have in fact been insignificant suppliers of capital to corporations. What, then, is their function? If we are to understand employment opportunity, income distribution, and productivity growth, we need an accurate analysis of the role of the stock market in the corporate economy.

    The insignificance of the stock market as a source of real investment capital exposes as fallacious the fundamental assumptions of the prevailing ideology that, for the sake of economic efficiency, a business corporation should be run to “maximize shareholder value” (MSV). As a rule, public shareholders do not invest in a corporation’s productive capabilities; they simply buy shares outstanding on the market, hoping to extract value that they have played no role in helping to create. And in practice, MSV advocates modes of corporate resource allocation that undermine innovative enterprise and result in unstable employment, inequitable incomes, and sagging productivity.

    The most obvious manifestations of the corporate misbehavior that MSV incentivizes are the lavish, stock-based incomes of top corporate executives and the massive distributions of corporate cash to shareholders in the form of stock buybacks, coming on top of already-ample dividends. Indeed, with stock-based pay incentivizing senior executives to do stock buybacks—i.e., having a company repurchase its own shares to give manipulative boosts to its stock price—over the past three decades the stock market has had a negative cash function. On the whole, U.S. business corporations fund the stock market, not vice versa.

    https://www.ineteconomics.org/perspe...ing-innovation
    Really? Telsa has lost money on every car it has sold over the last decade, lost money every single year, yet it's market capitalization is higher than the solid performance of Ford.

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    Quote Originally Posted by bajisima View Post
    But that's been manipulated too. Many workers share in stock purchase programs, 401ks and bonus programs of stock. So when they hear "tax stocks" they freak out. Back when the middle class was prosperous, few average workers had stock. Instead they had actual retirement programs.
    Doesn't really make sense that they would be more worried about taxed on income from stocks, than income from work.

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    Swamper chaos's Avatar
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    Quote Originally Posted by bajisima View Post
    But that's been manipulated too. Many workers share in stock purchase programs, 401ks and bonus programs of stock. So when they hear "tax stocks" they freak out. Back when the middle class was prosperous, few average workers had stock. Instead they had actual retirement programs.
    Capital gains is not paying its fair share of tax because of republicans but also because the democratic leadership does not represent the working and middle class.

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