Re: An idea for stock market reform

[Peter Dorman <dormanp@xxxxxxxxxxxxxxxxxxx>]

I think it is important to generate new ways of thinking about finance,
and I congratulate Trond for his creativity in coming up with Voting
Bonds.

My biggest concern is that "temp-shares" would exacerbate the problem of
short time horizons that plagues market-driven corporate ownership
regimes.  If my share liquidates at face value on day X, changes in its
value will depend entirely on projected dividends prior to X.  To the
extent that corporate decisions will be made to drive up share prices
(eg stock options to top managers, market for corporate control, etc.),
short-termism intensifies.  Of course, the deeper problem is with this
entire regime of equity market control.

I don't know whether this is a good thing or a bad thing, but
temp-shares coexisting in the market with different dates of maturity
would vastly complicate proxy battles, M&A's, and the like.

Finally, the biggest practical problem would be that equity would lose
much of its attraction, since capital gains would be modest and
front-loaded over each share's life cycle.  It would be possible to
market voting bonds only if dividends were increased to be competitive
with interest rates, but this would place heightened pressure on firms'
cash flow.  It would also increase the importance of external relative
to internal finance (with dimished retained earnings).

So these are some of the drawbacks.

Firms, of course, are free to arrange the equivalents under current
conditions by issuing shares (or buying back and reissuing shares) via
contracts specifying mandatory repurchase at fixed prices and dates.
Theory could be put to the test.

Peter Dorman