How The 'World's Dumbest Idea' Killed The US Economic Recovery
excerpt:
Over the last month, the Financial Times has been doing a great job in cataloguing the problems caused by the shareholder value theory. Now Robin Harding has terrific article pinpointing its role in undermining the US economic recovery.
In his article entitled “Corporate investment: A mysterious divergence” he explores a conundrum that has puzzled the world’s top economists: why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?
excerpt:
A brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled “Corporate Investment and Stock Market Listing: A Puzzle?” compares the investment patterns of public companies and privately held firms. It turns out that the lag in investment is a phenomenon of the public companies more than the privately held firms.
“They find that, keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.”
excerpt:
As Mr. Harding concludes, it is “time to stop thinking about corporate governance and executive pay as matters of equity and to regard them instead as a macroeconomic problem of the first rank.”
end excerpts
This could help explain why privately-held (often family-owned) Mittelstand companies have done so well in manufacturing.
Record high corp profits, measly net investment
Record high corp profits, measly net investment
cultivate a white rose
Re: record high corp profits, measly net investment
In a word, or two, pessimism or uncertainty regarding the future.Azrael wrote:
In his article entitled “Corporate investment: A mysterious divergence” he explores a conundrum that has puzzled the world’s top economists: why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?
Why would one expect otherwise? The larger the herd, the slower the reaction to changing conditions. Also, I think observation that humans manage their own assets better than they manage the assets of others is not a new phenomena.Azrael wrote:
excerpt:
A brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled “Corporate Investment and Stock Market Listing: A Puzzle?” compares the investment patterns of public companies and privately held firms. It turns out that the lag in investment is a phenomenon of the public companies more than the privately held firms.
“They find that, keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.”
Why the authors would be surprised is beyond me.
Re: record high corp profits, measly net investment
Some observers had noted this decades ago:Azrael wrote:How The 'World's Dumbest Idea' Killed The US Economic Recovery
excerpt:
Over the last month, the Financial Times has been doing a great job in cataloguing the problems caused by the shareholder value theory. Now Robin Harding has terrific article pinpointing its role in undermining the US economic recovery.
In his article entitled “Corporate investment: A mysterious divergence” he explores a conundrum that has puzzled the world’s top economists: why is net investment at a measly 4 per cent of output when pre-tax corporate profits are now at record highs – more than 12 per cent of GDP?
excerpt:
A brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled “Corporate Investment and Stock Market Listing: A Puzzle?” compares the investment patterns of public companies and privately held firms. It turns out that the lag in investment is a phenomenon of the public companies more than the privately held firms.
“They find that, keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.”
excerpt:
As Mr. Harding concludes, it is “time to stop thinking about corporate governance and executive pay as matters of equity and to regard them instead as a macroeconomic problem of the first rank.”
end excerpts
This could help explain why privately-held (often family-owned) Mittelstand companies have done so well in manufacturing.
Dividends to shareholders and investment in R&D have been replaced by internal dividends to exec management in the form of stock options, bonuses, etc.The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.
~ John Kenneth Galbraith
A great achievement of Wall Street was to convince the speculating, er, investing public that this is both right and natural. No shortage of defenders.
As Meyer Lansky quipped after touring the NYSE:
Boys, I just realized something terrible. We joined the wrong gang.
May the gods preserve and defend me from self-righteous altruists; I can defend myself from my enemies and my friends.
- Juggernaut Nihilism
- Posts: 1417
- Joined: Mon Feb 13, 2012 7:55 pm
Re: record high corp profits, measly net investment
Carl Icahn is the worst offender. He buys massively into companies that are sitting on a pile of cash, and uses CNBC and other news outlets to make noise about how he is going to pressure the board to use the cash to buy back stock and drive up the price. Other investors pile in in anticipation of the buyback and the price goes up. Then, whether the buyback happens or not, Icahn is the first to know and gets out with a big profit.
On the other hand, a lot of corporations are complaining that they are sitting on cash primarily because of a lack of reliably bankable projects.
On the other hand, a lot of corporations are complaining that they are sitting on cash primarily because of a lack of reliably bankable projects.
"The fundamental rule of political analysis from the point of psychology is, follow the sacredness, and around it is a ring of motivated ignorance."
Re: record high corp profits, measly net investment
I am chomping at the bit for when crowdfunding for equity unleashes the floodgates on a lot of that stuff.Juggernaut Nihilism wrote:Carl Icahn is the worst offender. He buys massively into companies that are sitting on a pile of cash, and uses CNBC and other news outlets to make noise about how he is going to pressure the board to use the cash to buy back stock and drive up the price. Other investors pile in in anticipation of the buyback and the price goes up. Then, whether the buyback happens or not, Icahn is the first to know and gets out with a big profit.
On the other hand, a lot of corporations are complaining that they are sitting on cash primarily because of a lack of reliably bankable projects.
Men often oppose a thing merely because they have had no agency in planning it, or because it may have been planned by those whom they dislike.
-Alexander Hamilton
-Alexander Hamilton
- Miss_Faucie_Fishtits
- Posts: 2152
- Joined: Sat Dec 17, 2011 9:58 pm
Re: Record high corp profits, measly net investment
David P. Goldman, is he leaving us?....... on the real value of corporatism....'>>........
http://www.atimes.com/atimes/Global_Eco ... 00913.htmlI have an alternate theory of the firm, namely that large firms exist to protect mediocrity - from the lunatics and conmen on one hand, and disruptive innovators on the other. An entrepreneur, my former partner Jude Wanniski liked to say, is a fellow who walks into your office wearing a propeller beanie and carrying a perpetual-motion machine convinced that he's going to be a trillionaire. Ex ante it's hard to tell the loonies from the real thing. For every Thomas Edison there are a hundred candidates for commitment to state mental health facilities.
Most people don't like disruption. They want to acquire a skill, work reasonable hours, secure reasonable pay, watch television in the evening and play golf or whatever on the weekends. They don't look deeply into the matters that concern them and are content to do what other people in their position do. If they are diligent, reliable, well-mannered and polite, they are just the sort of folk that the human relations types at corporations prefer. Without a way to socialize, train and employ such people the world would come to a halt, because they make up the vast majority. And that is the great contribution of corporations to social welfare: they find ways to make mediocre people useful.
By training, supervising and deploying the great mediocre mass, corporations earn the trust of consumers who are equally mediocre. Consumers want reliable and predictable products that do not challenge their tastes, habits, and skills. Corporations spend most of their research and development funds ascertaining these tastes and habits and designing products that conform to them.
She irons her jeans, she's evil.........
Re: Record high corp profits, measly net investment
When Spenglerman writes about what he knows something about it's worth reading.Miss_Faucie_Fishtits wrote:David P. Goldman, ....... on the real value of corporatism....'>>........
http://www.atimes.com/atimes/Global_Eco ... 00913.htmlI have an alternate theory of the firm, namely that large firms exist to protect mediocrity - from the lunatics and conmen on one hand, and disruptive innovators on the other. An entrepreneur, my former partner Jude Wanniski liked to say, is a fellow who walks into your office wearing a propeller beanie and carrying a perpetual-motion machine convinced that he's going to be a trillionaire. Ex ante it's hard to tell the loonies from the real thing. For every Thomas Edison there are a hundred candidates for commitment to state mental health facilities.
Most people don't like disruption. They want to acquire a skill, work reasonable hours, secure reasonable pay, watch television in the evening and play golf or whatever on the weekends. They don't look deeply into the matters that concern them and are content to do what other people in their position do. If they are diligent, reliable, well-mannered and polite, they are just the sort of folk that the human relations types at corporations prefer. Without a way to socialize, train and employ such people the world would come to a halt, because they make up the vast majority. And that is the great contribution of corporations to social welfare: they find ways to make mediocre people useful.
By training, supervising and deploying the great mediocre mass, corporations earn the trust of consumers who are equally mediocre. Consumers want reliable and predictable products that do not challenge their tastes, habits, and skills. Corporations spend most of their research and development funds ascertaining these tastes and habits and designing products that conform to them.
As good a summary of the corporation, entrepreneurship, and the financial crisis as I've read.
May the gods preserve and defend me from self-righteous altruists; I can defend myself from my enemies and my friends.