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April 13, 2008
Rewarding Bad Behavior
Don Boudreaux
Reading Larry Ribstein's excellent Ideoblog today, I was alerted to this report in yesterday's Wall Street Journal. Reading this report prompted me to send the following letter to the WSJ:
To the Editor:
Upset at what he has divined to be excessively high pay for corporate CEOs, Sen. Barack Obama wants to change "a system where bad behavior is rewarded'' (“Candidates Target Executive Pay,” April 12).
If Mr. Obama truly seeks to rein in institutions that systematically reward bad behavior, he should scale back government and forget about intruding into the private sector. In private markets, Smith spends only Smith’s money. Smith profits or loses depending on the prudence of his choices. This tight connection between each person’s actions and the consequences that he or she bears provides remarkably effective carrots and sticks encouraging private persons to behave responsibly. In the so-called “public sector,” in contrast, Smith spends Jones’s money. Smith profits or loses depending on how effectively he uses Jones’s money to buy votes from Jackson, Johnson, Williams and other persons who are assured by Smith of their moral right to free-ride on Jones’s resources. Surely, there is no surer recipe than this for rewarding bad behavior.
Sincerely,
Donald J. Boudreaux
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Comments
The intense level of populism today is cause for great concern. The fact that politicians of all stripes attract voters in this manner says just as much about voters than it says about the politicians. This enforces Caplan's thesis.
If a corporation's board of directors believes that by hiring a particular CEO, the resulting decisions of that CEO will increase (and sustain) the net profit of the corporation by $10 million, then it is quite rational to pay that CEO anything up to a penny short of the $10 million. It is also quite rational for common stock holders to vote for new directors -- via their proxies -- when they make bad decisions regarding who is hired as their [rememer, they're fractional owners of the company] CEO. The problem is, though, that too many dimwits who own stock, do not fully understand that they're the actual owners of the companies they own shares of. This is one of the reasons why people like Jim Cramer have an audience to preach to.
Dimwits with populist biases...I tell you this is a recipe for developing a my own version of a pessimistic bias!
Posted by: LowcountryJoe | Apr 13, 2008 11:15:10 AM
Yet many of these same protesters seem to have no problem with multi-million dollar contracts negotiated with star athletes.
Posted by: Sam Grove | Apr 13, 2008 12:53:12 PM
While I largely agree with you Don, I think you should mention how things should work in a real market economy. That is, shareholders would have total ownership of their assets, and there would be no laws granting additional powers to executives or boards of directors (or for that matter, no laws requiring organizations to adhere to certain legislated structures at all). Anything which grants shareholders their proper rights would likely decrease excessive executive compensation.
Posted by: Grant | Apr 13, 2008 1:07:04 PM
Well written letter. I do believe Obama does realize this though. In Audacity of Hope he speaks, though not at great length, about how overgrown government stifles the economy because it distorts incentives.
p.s. what's with the scare quotes around "public sector?"
Posted by: brian | Apr 13, 2008 1:16:21 PM
p.s. what's with the scare quotes around "public sector?"
The public sector is scary. Take a look and tell me this list doesn't scare you.
Posted by: LowcountryJoe | Apr 13, 2008 2:40:33 PM
"Anything which grants shareholders their proper rights would likely decrease excessive executive compensation."
This is wrong on two levels:
- Shareholders don't own companies the way you own your lawn chair. The "proper rights" of shareholders are determined by the corporate charter and state corporate law. Every shareholder voluntarily bought into the company with those items well in place, and everything they imply, and all of those implications priced into the stock at the time of purchase. They have no right to go back and amend the charter or state law via a federal intervention, even if it would improve the value of the company.
- Running a corporation actually requires some thought. There is an efficiency, as well as public policy, reason that corporations are governed by a board. A board is capable of rational policy making, taking into account all the trade-offs inherent in running a business. If they feel that paying a little more to attract better talent is value-maximizing, then no shareholder, or group of shareholders, without the benefit of the board's information and deliberations is likely to come up with a more optimal results.
Finally, the premise behind all this flack over CEO pay is that boards are lazy or corrupt, and that CEOs take advantage of their power. As someone who deals with boards regularly, I can assure you that this characterization is inane. In my experience, the vast majority of directors are highly conscientious men and women of integrity. If anything, they are uniformly wary about overpaying their CEO, and in most cases are firmly in control to prevent that.
Posted by: M. Hodak | Apr 13, 2008 2:45:09 PM
Murthaduck is no doubt swinging a noose around straight at people like us. He just can't wait for the Bolshevik revolution to start. Lock and load.
Posted by: FreedomLover | Apr 13, 2008 3:48:01 PM
M. Hodak:
Even if ABC Corp's board was lazy, it's their friggen business and they will pay the consequences in the profit/loss line.
Posted by: FreedomLover | Apr 13, 2008 3:53:42 PM
p.s. what's with the scare quotes around "public sector?"
-- Posted by: brian | Apr 13, 2008 1:16:21 PM
Read this article by Henry Hazlitt:
"The true distinction, and the appropriate vocabulary, however, would throw an entirely different light on the matter. What Galbraith calls the "private sector" of the economy is, in fact, the voluntary sector; and what he calls the "public sector" is, in fact, the coercive sector. The voluntary sector is made up of the goods and services for which people voluntarily spend the money they have earned. The coercive sector is made up of the goods and services that are provided, regardless of the wishes of the individual, out of the taxes that are seized from him."
Posted by: Marcus | Apr 13, 2008 4:21:29 PM
M. Hodak makes a great point Grant. If I may be so bold, I'd like to expand upon it by asking a simple question: by what means would we measure "excessive" CEO pay and who would determine this measure?
Posted by: mnm | Apr 13, 2008 6:50:22 PM
I wonder if Com. Obama would support a measure where citizens have a say in the president's pay. And the president's retirement package while he is at it.
Posted by: raja_r | Apr 13, 2008 7:56:41 PM
M. Hodak,
You make valid points, but the fact remains that many details of corporate charters are mandated by law, and have been changed by law after shareholders made their purchases. Of course, many parts of current corporate structures are probably good things (such as boards of directors representing shareholders), but how can we know how good? Without the ability for entrepreneurs and investors to form whatever sorts of charters they believe will function best, how can we have innovation and progress in corporate decision-making processes?
Also, I think some of the 'poison pill' severance packages weren't such great ideas, and many boards voted them in. How could such packages be in the best interest of the shareholders? I would think that if shareholders wished to prevent a takeover, they just wouldn't sell their shares.
Posted by: Grant | Apr 13, 2008 8:08:49 PM
mnm,
...by what means would we measure "excessive" CEO pay and who would determine this measure?
Since I do not see how any poison pill severance packages could be in the best interest of the shareholders, I'd call their adoption "excessive". Obviously its only the shareholders who determine what is "excessive" and what is not. But shareholders and entrepreneurs lack the ability to fundamentally alter the rules which govern the firms they create and own, so in many cases that question seems unanswerable to me. They aren't able to reveal their preferences by acting in cases where the corporate structure itself leads to overpay.
Posted by: Grant | Apr 13, 2008 8:14:31 PM
If people behave according to their own self-interest, then CEOs have every incentive to set things up so that they get good bucks no matter what their performance or the company's. If the "invisible hand" of the market was effective in dealing with incompetent or corrupt CEOs, then we wouldn't be having this discussion at all.
Posted by: David P. Graf | Apr 13, 2008 9:06:34 PM
Without the ability for entrepreneurs and investors to form whatever sorts of charters they believe will function best, how can we have innovation and progress in corporate decision-making processes?
Start-ups are free to innovate. And no one has to sell shares of stock in their company...there are other ways to raise cash to expand; such as through borrowing.
Of course, many parts of current corporate structures are probably good things (such as boards of directors representing shareholders), but how can we know how good?
Is this the justification that leads a hypothetical President Obama to persuade congress to send him a bill that legislates alternative cororate structures? Do you or do you not support legislation that might create these changes?
I would think that if shareholders wished to prevent a takeover, they just wouldn't sell their shares.
Shed some light on this please, I am not sure what you mean.
Obviously its only the shareholders who determine what is "excessive" and what is not.
No, anyone [including McCain/Obama/Clinton and 500+ other asshats] can be judgemental and label/determine poison pill severance packages as excessive. But shareholders are the only real stakeholders and only face the consequences of these. I do not think M/O/C and 500+ have any business legislating anything new. Again, do you?
But shareholders and entrepreneurs lack the ability to fundamentally alter the rules which govern the firms they create and own, so in many cases that question seems unanswerable to me.
No, they do have the ability but seldom realize that they do. The question does not need to be answered by you unless you really feel compelled to make it your business. And if you are compelled, why must you be the nanny here?
They aren't able to reveal their preferences by acting in cases where the corporate structure itself leads to overpay.
Yes they are! But the truth is, very few people have a large enough percentage of shares to cause their revealed preferences have an affect. And, many shareholders do not participate because they are passive in their fractional ownership of the company. This is similar to the Public Choice problem. The difference, however, is that in spite of the problems of agency in a private company, the company still has to satisfy the shareholders over the long haul by turning a profit (being wise with spending and satisfying the consumer to keep revenue increasing). Does government handle the agency problem better or worse?
Posted by: LowcountryJoe | Apr 13, 2008 9:20:39 PM
If the "invisible hand" of the market was effective in dealing with incompetent or corrupt CEOs, then we wouldn't be having this discussion at all.
Let's recap.
Not everyone see this as some problem within the market.
You see a problem and, to be fair, so do many others. But, in the end, the shareholders of companies where these percieved problems exist are the only ones who face the consequences.
The shareholders have the authority to make changes as to which memeber compose the board of directors. This is where the discussion should end regarding what outsiders (non shareholders] can or should do.
We're having this discussion, amongst other reasons, but, primarily, because politicians want to get involved in the decision-making that is the BOD's (and shareholders) responsibilities.
We're having this discussion at The Cafe specifically because some of you seemingly support the government's meddling into affairs that it should have no business meddling in. I write 'should' because that's my opinion and it is probably shared by the majority here. You, Mr. Graf, likely have your own opinion. So let's hear your opinion. Does government have a place in this matter? And if you feel this way, do your best, here at The Cafe, to justify it. Waiting!
Posted by: LowcountryJoe | Apr 13, 2008 9:35:06 PM
David P. Graf,
Corporate processes and many of the rights of shareholders and executives were created (or at least solidified) by law, not by the market. So the invisible hand really doesn't have a lot to do with it.
LowcountryJoe,
How can entrepreneurs and investors create their own charters? If a businessman thought alternative shareholder voting schemes (perhaps utilizing new technologies such as prediction markets) would be helpful, how could he act on that belief? In many cases it would be illegal to do so.
See: http://predictocracy.org/blog/?p=44
On one hand you seem to think that the current corporate structures are near-optimal, but on the other hand you are skeptical of government involvement in this area (as am I). This confuses me, because current structures were created or at least solidified by law. Frankly, I cannot imagine how a democratic process could make a sound decision in this area, regardless of who was in office at the time.
Shed some light on this please, I am not sure what you mean.
The justification for poison pills is to prevent hostile takeovers. But by definition, hostile takeovers aren't hostile to shareholders (who willingly sell their shares). Those pills are voted in (at least in the examples I have experience with) by Boards, who supposedly act in the best interest of the shareholders. But if they were acting in the interest of shareholders, why would they vote to reduce the chances of a takeover?
Posted by: Grant | Apr 13, 2008 9:55:22 PM
Grant, I think I might be misunderstanding you. I'd like to ask for some clarification.
My understanding of poison pills is two fold: 1) they are used to prevent hostile takeover, and 2) they are used to protect the shareholder's proportionate ownership in the company. I believe they are also referred to as "preemptive rights" or "antidilution policies." I see that you mentioned number 1, but are you aware of number 2?
Posted by: mnm | Apr 13, 2008 10:39:18 PM
Grant,
I am unclear on corporate charters and the legislation that allows them to be in place. To my knowlegdge, though, there are several different ways to structure an enterprise to do business. There are LLCs, partnerships, etc. There are ways to raise cash besides having third-party shareholders. There are ways to have thrird-party shareholders and structure the controls that these shareholders have. Please tell me if I'm wrong about this, though, since it is an area where my knowledge is limited.
On one hand you seem to think that the current corporate structures are near-optimal, but on the other hand you are skeptical of government involvement in this area (as am I). This confuses me, because current structures were created or at least solidified by law.
Yes, I am skepital of government involvement. This should be obvious! Also, I am not convinced that a business's legal structure has to fit a one-size-fits-all box that you're pidgeonholing it into. So, being that I honestly believe that there are other structures -- which I may be incorrect about -- I think this should clear up my supposed inconsistency. By the way, I certainly did not claim the current corporate structure optimal even though I am defending the current structures from the wishes of the asshats and moonbats who see injustices. I do believe that I wrote of agency problems. I did, didn't I?
The justification for poison pills is to prevent hostile takeovers. But by definition, hostile takeovers aren't hostile to shareholders (who willingly sell their shares). Those pills are voted in (at least in the examples I have experience with) by Boards, who supposedly act in the best interest of the shareholders. But if they were acting in the interest of shareholders, why would they vote to reduce the chances of a takeover?
I still do not understand. Therefore, I do not have an answer to your question. Perhaps you can break this down more simply or that another reader will tackle it.
Frankly, I cannot imagine how a democratic process could make a sound decision in this area, regardless of who was in office at the time.
So, does this mean that you find the political rhetoric regarding the promising of legislation in these matter odious?
Me, earlier: And if you are compelled, why must you be the nanny here?
Well?
Me, earlier: Does government handle the agency problem better or worse?
Well?
Posted by: LowcountryJoe | Apr 13, 2008 10:48:40 PM
That companies may be burdened by limiting structures, internal bureaucracies, etc., could be seen as a boon to start ups that don't have to deal with so much crap. Little wonder that big companies are often supportive of legislative burdens on business, makes it harder for new competition.
Posted by: Sam Grove | Apr 13, 2008 11:42:26 PM
Grant,
I agree that corporate charters and state laws have been, and ought to be, subject to revision. My point is that they should be revised by the shareholders and the states, respectively, not by the federal government, and certainly not on the recommendations of a presidential candidate trolling to popular votes.
As a practical matter, every company has a choice of what is in or out of their charter. Most of the limitations on what managers or directors can do in the context of their charters is actually guided by common law, not state or federal law. Every entrepreneur at the time of incorporation is free to choose the state of their incorporation. If you think you're company would be more valuable with maximum board discretion, then incorporate in Delaware. If you think your company would be more valuable with every constraint that the governance mavens love, then incorporate in North Dakota. This type of experimentation is alive and well--as long as the federal government allows it. In any case, most states simply offer default rules for charters, which the entrepreneur is free to amend in their own charter, according to what his lawyers advise.
As a matter of principle, the shareholders buy into all of these prior decisions at the time they buy the shares. As a shareholder, I'd rather not give a flying fig what further constraints Barack Obama or George Bush think my company should have to adopt. The federal government's role in corporate governance has always been limited to disclosure--a company's managers and directors can do whatever the law allows, including engage in conflicts of interest, as long as they are disclosed. The states as "laboratories of democracy" and the markets are supposed to take care of the rest.
By the way, I share your concerns about poison pills, but there actually are some reasons the shareholders might benefit from those, too. I will leave that for another post, but the basic message is that boards should be left to do their job. With rare exceptions, they're the only ones with combination the information, experience, and interests to do it right.
Posted by: M. Hodak | Apr 14, 2008 9:33:34 AM
"Since I do not see how any poison pill severance packages could be in the best interest of the shareholders..." Grant
I think you're mixing two different things here, golden parachutes and poison pills.
I know many people think of golden parachutes as being bad. I recall a discussion 24 years on a New York Times article that called them "me-first management." However, as Michael Jensen as written (sorry I don't recall the title of the article), golden parachutes have the opposite affect -- they provide an incentive for managers to accept acquisition proposals.
Poison pills have the opposite intent -- to discourage takeover attempts. And yes, evidence does show they destroy shareholder wealth. But states allow them because the Gordon Gekkos of the world are considered evil.
Posted by: Dano | Apr 14, 2008 9:44:17 AM
Dano, maybe I'm confused, but the "poison pill" I have experience with took the form of a "golden parachute", and led to the management of a company to embrace a takeover.
I certainly agree that there are many ways to structure a corporate charter, but I contend there should be an infinite number of ways (baring fraud, etc). Baring the ability to truly innovate, how can we know if the current corporate setup is the best that can be done?
I'm not familiar with all the legislation involved, but I was under the impression (from reading Predictocracy and other works on prediction markets) that state law and SEC regulation limited the structure of decision-making processes of businesses in a number of different ways. Is this not correct?
Posted by: Grant | Apr 14, 2008 11:22:15 AM
Don,
Instead of the outrage about what some candidate said, what about some outrage for the things that have been done and are being done by this Republican administration? Where is the outrage over the handouts to Wall Street?
Posted by: cca | Apr 14, 2008 12:50:18 PM
Face it, high compensation for top CEOs is set by the talent market.
Look at this reference point: private equity firms routinely offer better CEO compensation than public companies. The reason: they are worth it.
PE firms are highly incented to generate huge investment returns, and they routinely beat the S&P 500.
Posted by: MT | Apr 14, 2008 1:03:08 PM
Can coporations exist with the state? My understanding is that they can't due to the limited liability the have. Am I confused about this?
Posted by: Deryl G | Apr 14, 2008 1:59:28 PM
That is suppose to read "without the state".
sorry
Posted by: Deryl G | Apr 14, 2008 2:19:31 PM
Deryl,
They can, because banks still chose to lend to them despite their limited-liability status. Corporations could exist without state sponsorship in the form of firms which simply refused to take loans their shareholders would personally guarantee.
Posted by: Grant | Apr 14, 2008 2:27:39 PM
Grant,
I'm sorry, I don't understand. What does limited liability have to do with loans and state sponsorship?
In the absence of any laws specifically outlining limited liability and no laws against it, a corporation can write such liability limits into its formation documents. In fact, the limited liability is written in the operating agreement of corporations regularly - even with existing laws regarding corporations. Any new member of, say, an LLC signs up to the same operating agreement.
Why would corporations require a personal guarantee of their shareholders/investing members? And why do you assume that debt is required to form a corporation.
Posted by: Methinks | Apr 14, 2008 3:07:15 PM
I don't really understand why people are so upset about CEO salary. Why is nobody concerned with the compensation of Tom Cruise or George Clooney? Aren't the salaries of Hollywood big-wigs just completely out of hand? Isn't a significant portion of what I pay for a ticket going straight into their pockets?
I'd be willing to bet that if you took an A-list celebrity and a Fortune-500 CEO with comparable compensation, the CEO would work longer and harder than the celebrity, would be less likely to be a drug user and , on average, would have fewer divorces.
Heck, if you want to blame somebody for the latest economic calamity, blame Hollywood -- their hedonism has made everybody buy into the idea that they need to live beyond their means. How many teenage girls followed the likes of Britney Spearks, Paris Hilton and Nicole Ritchie into debauchery? How many followed Warren Buffett there?
Of course, you won't hear Obama railing against Hollywood.
Posted by: Chris | Apr 14, 2008 3:29:07 PM
I'm really ignorant on this stuff, so I apologize in advance if my questions are ridiculous.
My understanding is that the limited liability extends to more than just creditors. For instance, if a sue corporation XYZ for M dollars and win I can’t go after share holders if XYZ is unable to cover that expense. True?
If that is true, then how can anything in the charter for the corporation limit that?
Posted by: Deryl G | Apr 14, 2008 3:46:46 PM
Read this article by Henry Hazlitt:
"...The coercive sector is made up of the goods and services that are provided, regardless of the wishes of the individual, out of the taxes that are seized from him."
Posted by: Marcus
Have you heard the story about the western woman who visited China (this is admittedly kind of a dated story, but the lesson still holds).
A British woman visited China, where she took a tour of the countryside. She saw a group of men hauling a large cart (or something like that) surrounded by a group of men with whips. When one of the men were to slack on his job, he would be whipped.
"That's awful!" said the British woman.
"No!" replied her tour guide, "the men hauling the cart pay the men to whip them. Otherwise, everyone would slack and their work would never get done."
Isn't this an example of a coercive arrangement, like the public sector? But it's necessary or everyone involved would be worse off. However much the individual wants to slack, he is "coerced" into not doing so. He could avoid the coercion by picking up and leaving, or not joining the group in the first place, just as you have the choice to not live in a society. While those may not seem like appealing alternatives, they are alternatives nonetheless.
Hobbes was the originator (correct me if I'm wrong about Hobbes on this one) of the idea of voluntary coercion, to prevent the war of all against all. Consider his arguments as well.
Posted by: brian | Apr 14, 2008 3:47:50 PM
Sorry, instead of "formation documents", I should have said "operating agreement". But in the absence of state law and state charters, it may very well be the formation documents. Who knows.
Posted by: Methinks | Apr 14, 2008 4:08:25 PM
Brian,
A few disparate thoughts:
I do believe that Hobbes has long since been superseded in thought. However, the battle against Leviathan wages on.
Leviathan and the rule of law are not the same thing.
In the market people 'pull carts' for their own benefit.
Posted by: Marcus | Apr 14, 2008 5:10:43 PM
Methinks,
As I've encountered it, limited liability means that shareholders are not personally responsible for the debts of the businesses they own. I don't assume debt is required to run a business, but it is required for limited liability to be relevant.
I suppose debts could also be incurred via civil suits, but that would seem to be a lot rarer than loans.
Posted by: Grant | Apr 14, 2008 5:30:59 PM
Deryl G,
If that is true, then how can anything in the charter for the corporation limit that?
I don't think it can. In those cases, the extent of liability would be determined by the law (like it currently is today). In that sense I suppose corporations could not exist without state approval.
Posted by: Grant | Apr 14, 2008 5:36:39 PM
Grant,
Actually, lawsuits against corporations are not uncommon at all.
I understand that limited liability is part of corporate law. A corporation is a legal entity in its own right, the shareholders are merely residual owners. However, even without government "sponsorship" (as you call it), liability may be limited by adding those clauses and covenants that limit liability of shareholders into the operating agreement. Given this, I don't understand why you think limited liability occurs solely because of state charters and why you think that liability couldn't be limited without them.
Posted by: Methinks | Apr 14, 2008 5:41:45 PM
Most corporate debts are (hopefully!) not the result of lawsuits, but I get your meaning.
I don't think limited liability occurs solely because of state charters. As I said earlier, I think limited liability could exist without state sponsorship. Creditors can choose to lend to whom they wish, under what terms they wish. Shareholders and employees could also, by contract, agree to share tort liability.
Posted by: Grant | Apr 14, 2008 6:01:10 PM
Grant,
I think I misread your original sentence (written to Deryl) and that is the source of my confusion. Thanks.
Posted by: Methinks | Apr 14, 2008 6:04:30 PM
err...one more thing, though. There is some significant benefit to standardizing the charter for C-corps. It makes the shares easier to trade on an exchange (because one doesn't have to spend the time to familiarize himself with the individual companies' operating agreements' to buy shares) and the resulting liquidity makes it less risky to invest. This is a pretty huge benefit.
Posted by: Methinks | Apr 14, 2008 6:08:01 PM
Meanwhile, the direct "should government legislate anything to do with CEO compensation" question remains unanswered by the Cafe's resident injustice police.
Well?
Posted by: Lowcountryjoe | Apr 14, 2008 6:36:27 PM
and the resulting liquidity makes it less risky to invest.
Why ought it be less risky?
To be clear, I'm not asking what the benefits of it being less risky are.
Posted by: Deryl G | Apr 14, 2008 7:27:54 PM
"Opinion polls find many Americans are angry over high levels of executive pay."
I pulled this from the WSJ article.
What does this mean? What weight, what validity does it have on which an honest objective person can hang a hat?
"many Americans"? How many, what percentage?
And WTF does it matter since "many" Americans are dumber than a box of rocks about most of the important things that affect their life?
Sometimes I want to grab my head and run screaming into the past just to find some relief from the idiocy of modern America. I think I'd even be willing to accept the low scale of health care just to find and talk to people who saw things as they are and not as someone else tells them that they are.
Posted by: vidyohs | Apr 14, 2008 7:38:29 PM
Why ought it be less risky? - Deryl
Liquidity reduces risk because it allows investors to move in and out of investments quickly. Consider the following scenarios:
scenario 1: I'm an investor considering an investment in a company which does not trade on a public market. Thus, if I find myself in need of cash, I will not be able to liquidate my shares quickly as I will have to spend quite some time finding people who will buy my shares. While I search for people to buy my shares, I'm subject to event risk (the longer you hold an investment, the greater the risk that something will happen). As you can imagine, searching for a buyer for your illiquid shares is also time consuming and costly (opportunity cost of your time).
Scenario 2: I'm considering investment in a company the shares of which trade on a public exchange. This means there's always a market for the shares. If the need arises to monetize my investment quickly, I can do so by simply sending my order to my broker.
Obviously, scenario 1 is more risky. But it's also more costly. To compensate me for my risk and the cost of finding a buyer for my shares, I would require a higher return than I would in scenario 2. Thus, scenario 1, raises the cost of capital for businesses as well.
If there are no standardized rules regarding equity ownership in publicly traded companies, there can really be no public market and the absence of public markets adds liquidity risk, which raises the cost of capital.
Posted by: Methinks | Apr 14, 2008 8:59:23 PM
Vidyohs,
Take heart. What's the percentage of Americans who want to do away with the death tax? 70%? 80%? I don't remember, but it's pretty high.
If they're not going to get what they want (and they are unlikely to), then these dumbasses probably won't either.
Posted by: Methinks | Apr 14, 2008 9:02:55 PM
Methinks,
That thumbnail explanation of liquidity above is pretty damn good. I am copying it to send to my brother who plays the stock market, if you don't mind. Hell, I even understood it and that is kudos to you.
Posted by: vidyohs | Apr 14, 2008 9:29:42 PM
vidyohs,
How much can this ignorance be blamed on our education system? For instance, when I was in HS it had more required class in phys-ed than I did in economics.
The liberal control of our education system is a true tragedy.
Posted by: Deryl G | Apr 14, 2008 9:32:03 PM
Methinks,
That explanation was awesome. However, it didn't address what I'm after. I think I asked my question poorly.
I'm not sure what the right word is, so bare with me here.
I want an ethical explanation for why investment ought to be less risky (as it currently is).
Doesn't that limited liability make it possible for some schmuck to get screwed over and have to legal recourse?
I'm okay with limited liability in regards to debt as long as it is negotiated freely with the lender.
However if I am damaged by corporation ABC to the extend of M dollars, but I can only recoup M-X dollars due to limit liability, then I have been screwed.
I'm looking for a justification for that.
Posted by: Deryl G | Apr 14, 2008 9:40:07 PM
Deryl G,
To be honest I am not sure how to assign a degree of fault to the education system. I do assign a lot of blame to both parents and the education system, but there are other factors that make it difficult to do much more than moan and grab my head.
I believe in change and progress being inevitable, and naturally as humans have progressed technologically we have made the divorcing of human from nature more and more distinct. And, this divorcing of humans from the reality and practicality of nature is the prime reason that people are so clueless today.....they have no reference points to guide them along the reality path instead of the fantasy path that modern America presents them.
A fact: There are people who are stupid enough to buy into the idea that government, particularly George Bush, caused Katrina, not the resulting disaster, but the actual storm. What do you do with people that stupid.....give 'em a job in your company?
A fact: There are people stupid enough to believe that mankind can cause a disaster of Global warming and can rectify it by cutting carbon emmissions, if not in our lifetime certainly for our children. What do you do with people that divorced from reality.....give 'em a job in your company?
Once we reached a point where the majority, vast majority, no longer have touch with the reality of nature and her complete and utter disregard or concern for humanity, we began to have people who will believe anything an "authority" tells them because they have no reference points or knowledge to contradict that false information.
My solution, grab my head and run screaming into the past (1875) and deal with people who understood that you don't march down to the seashore and command the tides.
Posted by: vidyohs | Apr 14, 2008 9:43:41 PM
Thank you, vidyohs. I'm sure there are more eloquent explanations, but sometimes quick and dirty is the best I can do.
Posted by: Methinks | Apr 14, 2008 9:55:55 PM
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