RE: An idea for stock market reform

["Colander, David" <colander@xxxxxxxxxxxxxxxxxxxxx>]

I too congratulate Trand on his creativity.  I think thinking about
modifying capital market institutions is an important policy issue.  I think
Peter's comments about problems however make it highly unlikely, and it is
unclear how it would be legislated.

I've been thinking along somewhat different lines--although with some of the
same ends as Trand had.  My thought was to have a limit on how much a share
can increase in a year--say 20%.  After that the firm will have to issue new
shares to all who want in at that price. That would mean that when a firm
becomes "hot" it will have an enormous infusion of cash.  It would also mean
that the value of insider information would be less.

I haven't figured out whether to have any limit on the down side--if it did
it would have to have some way to finance it--or whether the symmetry
matters.

There are probably as many or more problems with this as there are with
Trand's but I would like to hear them.



> ----------
> From: 	Peter Dorman
> Reply To: 	pkt@xxxxxxxxxxxxxxxx
> Sent: 	Thursday, December 17, 1998 11:00 PM
> To: 	POST-KEYNESIAN THOUGHT
> Subject: 	Re: An idea for stock market reform
>
> 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
>