Comments on: Stock: An Unnecessary Illusion http://counterecon.com/2008/01/11/stock-an-unnecessary-illusion/ Critical Thinking Applied to Economics and Finance Mon, 21 Jun 2010 08:22:14 +0000 hourly 1 http://wordpress.com/ By: supersnapp http://counterecon.com/2008/01/11/stock-an-unnecessary-illusion/#comment-116 supersnapp Sat, 15 Nov 2008 18:33:23 +0000 http://counterecon.wordpress.com/2008/01/11/stock-an-unnecessary-illusion/#comment-116 We like to propose all the feasible options here at CounterEcon. While this post proposes that stocks are essentially a very low cost way for companies to raise money (and not pay it back). What is interesting is that they do not seem to be actually raising all that much money with stocks. While this might seem illogical, stocks may have begun to transfer from low cost capital to primarily unaccounted for executive compensation. See the excerpt from the excellent Dollars and Sense website. "The process of financialization has not made finance more effective at fulfilling what conventional economic theory views as its core function. Corporations are not turning to the stock market as a source of finance for their investments, and their borrowing in the bond markets is often not for the purpose of productive investment either. Since the 1980s, corporations have actually spent more money buying back their own stock than they have taken in by selling newly issued stock. The granting of stock options to top executives gives them a direct incentive to have the corporation buy back its own shares—often using borrowed money to do so—in order to hike up the share price and allow them to turn a profit on the sale of their personal shares. More broadly, instead of fostering investment, financialization reorients managerial incentives toward chasing short-term returns through financial trading and speculation so as to generate ballooning earnings, lest their companies face falling stock prices and the threat of hostile takeover." http://www.dollarsandsense.org/archives/2008/1108vasudevan.html We like to propose all the feasible options here at CounterEcon. While this post proposes that stocks are essentially a very low cost way for companies to raise money (and not pay it back). What is interesting is that they do not seem to be actually raising all that much money with stocks. While this might seem illogical, stocks may have begun to transfer from low cost capital to primarily unaccounted for executive compensation. See the excerpt from the excellent Dollars and Sense website.

“The process of financialization has not made finance more effective at fulfilling what conventional economic theory views as its core function. Corporations are not turning to the stock market as a source of finance for their investments, and their borrowing in the bond markets is often not for the purpose of productive investment either. Since the 1980s, corporations have actually spent more money buying back their own stock than they have taken in by selling newly issued stock. The granting of stock options to top executives gives them a direct incentive to have the corporation buy back its own shares—often using borrowed money to do so—in order to hike up the share price and allow them to turn a profit on the sale of their personal shares. More broadly, instead of fostering investment, financialization reorients managerial incentives toward chasing short-term returns through financial trading and speculation so as to generate ballooning earnings, lest their companies face falling stock prices and the threat of hostile takeover.”

http://www.dollarsandsense.org/archives/2008/1108vasudevan.html

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