Your question about won't potential buyers of stock shares be concerned about whether future potential buyers will still believe that the price will continue to rise is at the heart of most of the theoretical models of speculative bubbles, especially the "rational bubble" literature, which is very large. In the pure theory model this takes on an infinite horizon time dimension and for a rational bubble one has to show that there will be no "backward induction unraveling" that would cause the initial buyer not to buyer because everybody else will know that everybody else is too smart to end up holding the "hot potato" at the infinite end of time.
Of course in the real world we do not have infinite time horizons and are not perfectly informed or perfectly rational. Thus, as has been observed historically ever since the original tulipmania of the 1630s and the Mississippi and South Sea bubbles of 1719-20, there are smarter insiders who buy in early and get out early, leaving the "devil to the hindmost," classically a bunch of "widows, orphans, ministers," and other pathetic suckers who lose out big when the crash finally hits. Barkley Rosser Professor of Economics James Madison University Harrisonburg, VA 22807 USA tel: (001)-540-568-3212 fax: (001)-540-568-3010 email: rosserjb at jmu.edu On Tue, 5 May 1998 13:03:37 -0400 (EDT) Rakesh Bhandari <bhandari at phoenix.Princeton.EDU> wrote:
> >, heavy shareholder pressure
> > on firms to cut costs and hold down investments
>
> Doug, please explain to me how and why shareholders hold back investments.
> 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?
> 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).
>
> 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. 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.
>
> Best,
> Rakesh
> 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.
>
-- Rosser Jr, John Barkley rosserjb at jmu.edu