>Doug, please explain to me how and why shareholders hold back investments.
They demand very high minimum rates of return ("hurdle rates") on corporate investments. It's the major reason why firms are distributing cash to shareholders through buybacks and takeovers rather than re-investing them in the underlying business.
>Even an Alfred Chandler warns that managers have been forced to spurn the
>long term and underinvest in research and development. But is it true?
I'm not sure that you can show that the overall level of R&D has been held down by shareholder pressure, but there's little doubt that priorities have been shifted away from R and towards D - away from basic research and towards product development. The most prominent example is what's happened to Bell Labs over the last 40 years.
>Take Mark Roe's objection: Even furiously trading shareholders include
>buyers as well as sellers. Buyers are interested in what price they will
>get for their stock market when they sell it. So, today's buyers is
>interested in what tomorrow's buyer will pay, who is interested in what
>the next day's buyer will pay, and so on. Since each buyer is dependent on
>the price to be garnered in some distant long run, each buyer is
>interested in the long-run price, even if he or she will not be long-term
>owner. There must be something more complex to support the short-term
>argument than furious trading alone." (Strong Managers, Weak Owners: The
>Political Roots of American Corporate Finance, p. 240; haven't read the
>book yet).
They care most about the share price, whose most important determinants are profits and valuation levels (themselves a joint function of interest rates and sentiment). Investment today may increase profits tomorrow, but it may also decrease profits should the economy turn down, leading a high fixed cost burden. The American biz press today is full of stories about how Asia (and to a lesser extent Europe) overinvested in marginal projects because of the absence of shareholder discipline.
Fun factoid along these lines: Microsoft, with almost no physical capital infrastructure, has a market cap higher than Exxon's, which has a giant one.
>What induces shareholders to motivate managers to disgorge cash rather
>than investing it is the declining marginal efficiency of capital, i.e.,
>the falling profitability on new investment (I was surprised that
>there is no discussion of this pivotal Keynesian concept and it
>relation to Marx's theory of the falling rate of profit--see for
>example Mattick's writings).Even Jensen recognizes the declining marginal
>efficiency of capital in his hyper fetishistic way, as you quote him on
>p. 269 of your book.
I say there, and I'll say again, that Jensen is really onto something in his argument about free cash flow - that mature corporations throw off more cash than they can reinvest at a "satisfactory" rate of profit.
>The limits to capital accumulation can still be
>traced to the mode of production, not the division of surplus value in the
>realm of circulation.
Financial structures are about more than dividing the booty - they help structure social classes and affect the mode of production. The late 19th/early 20th century merger wave simultaneously created the modern big corporation and the modern stock market. Small producers failed or were absorbed and paid off with bits of stock. Production was reorganized in tandem with ownership and finance.
>ps this is not to say that there are not inherent disadvantages to stock
>market, as opposed to bank, finance; for example, we have your
>lucid discussion of information asymmetries, p.170 ff, but I would argue
>there are as many disadvantages to bank finance. On this later. But for
>now I am not convinced that you have proven that short-termism is the
>fault of the stock market per se.
Managers face a very different set of incentives when they're under constant scrutiny from Wall Street and potential takers-over than from when they're in a placid bank environment where takeovers are rare. Managers' standing in the labor market is a function of their ability to deliver steady predictable quarterly earnings growth. Money managers in turn are rated according to their ability to deliver better quarterly returns. This is how the field of corporate production works in the U.S. These pressures just don't operate in bank systems. That doesn't mean that bank systems aren't driven by profit earned through exploitation; they just different ways of doing capitalism. I think bank systems also produce more stable social systems, more amenable to welfare state reforms and union power, than stock-market systems; everything about the American system is designed to intensify competition. Dulling competitive forces may, as Michael Perelman argued about Keynesian policies, lead to a weaker form of capitalism, but, hey, we're for that, aren't we?
Doug