Hostname: page-component-76fb5796d-5g6vh Total loading time: 0 Render date: 2024-04-27T03:50:47.270Z Has data issue: false hasContentIssue false
  • English
  • Français

The Quest for Shareholder Value: Stock Repurchases in the US Economy

Published online by Cambridge University Press:  17 August 2016

William Lazonick
William Lazonick*
Affiliation:
University of Massachusetts Lowell
Get access

Summary

During the 1980s and 1990s the argument that “maximizing shareholder value” results in superior economic performance came to dominate the corporate governance debates. In this paper, I outline the rationale for the shareholder-value perspective, and show that, rooted in agency theory, it lacks a theory of innovative enterprise. Hence it cannot be used to analyze the conditions under which the stock market supports or undermines the process of value-creation. To go beyond agency theory and its shareholdervalue perspective, I present a framework for analyzing the functions of the stock market in the business corporation and the influence of these functions on the social conditions of innovative enterprise. I then use this framework to explain why in the United States since the 1990s there has been a widespread trend in corporate stock repurchases, including a sharp acceleration in buybacks since 2003. Focusing on a list of the largest corporate repurchasers in the United States, I raise questions concerning the relation between stock buybacks and value-creating investments in the US economy as a whole. I conclude with a discussion of why companies do stock repurchases, and in particular whether they can be justified as a contribution to innovative enterprise. I argue that the ultimate justification for stock repurchases is the ideology of “maximizing shareholder value” - an ideology that works to the direct benefit of corporate executives who make corporate resource allocation decisions and who derive high levels of remuneration from munificent stock option awards.

Résumé

Résumé

Pendant les années 1980 et 1990, l'argument selon lequel la « maximisation de la valeur pour l'actionnaire » permettrait d'accéder à des performances économiques supérieurs parvint à domineer les débats sur les forms de gouverance de firmes. Dans cette contribution, l'auteur analyse le raisonnement qui fonde cette perspective de la « valeur pour l'actionnaire » et montre que son ancrage dans la théorie de l'agence ne lui permets pas d'appréhender les questions afférentes à « l'entreprise innovante ». Dès lors, elle n'est pas en mesure de fournir un cadre adequate pour appréhender les conditions sous lesquelles les marches boursiers peuvent soutenir le (ou nuire au) processus de création de valeur. Pour parer à ces carences, l'auteur propose un cadre conceptuel qui a vocation à éclairer les fonctions des marchés d'actions dans les logiques d'entreprise et l'influence qu'elles peuvent avoir sur les conditions sociales de développement de l'entreprise innovante. Le cadre est ensuite mobilize pour expliquer pourquoi, dans le cas américain tel qu'il s'est présente depuis les années quatre vingt dix, on constate une tendance très forte aux rachats de titres par les enterprises qui a connu une nette acceleration après 2003. En se focalisant sur un échantillon des plus importants opérateurs en matière de relution aux États-Unis, l'article montre ainsi comment, au niveau de l'économie américaine, sont rendus les arbitrages entre rachats de titres et investissements porteurs de création de valeur. La conclusion examine la question des motivations au rachat et propose, plus précisément, d'évaluer si ils peuvent être justifiés du point de vue de leur contribution au development des enterprises innovantes. La thèse défendue est alors que la justification ultime des rachats de titres se résume à l'idéologie de la « maximization de la valeur pour l'actionnaire » qui est de fait au service des dirigeants d'entreprises qui y puisent à la fois la justification de leur pouvoir en matière de décisions d'allocation et des revenus substantiels tirés de l'usage avantageux des programmes de stock-options.

Keywords

Bourseentreprise innovantela valeur pour l'actionnaireles rachats de titresL20stock marketinnovative enterpriseshareholder valuestock repurchasesL20
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 74 , Issue 4 , 2008 , pp. 479 - 540
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2008 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abbate, J. (2000). Inventing the Internet, MIT Press.Google Scholar
Aubin, D. (2006). “Cisco sells $6.5 billion in record US debt debut,” Reuters News, February 14.Google Scholar
Auten, G. (1999). in Cordes, J., Ebel, R., and Gravelle, J. , eds., The Encyclopedia of Taxation and Tax Policy, Urban Institute Press.Google Scholar
Baldwin, C, Clark, K. (1992). “Capabilities, and Capital Investment: New Perspectives on Capital Budgeting,” Journal of Applied Corporate Finance, 5, 2: 67–87.Google Scholar
Bass, D. (2006a). “Ballmer pressured to buy back shares of Microsoft stock,” Seattle Times, May 13.Google Scholar
Bass, D. (2006b). “Sagging stock sends Ballmer to Wall Street to quell critics,” Seattle Times, May 30.Google Scholar
Bawden, T. (2007). “Morgan Stanley bailed out by Beijing after $9bn write-off,” The Times, December 20.Google Scholar
Bel Bruno, J. (2007). “Merrill Lynch raises up to US$6,2b as its sells stake to Singapore fund,” Canadian Press, December 25.Google Scholar
Bel Bruno, J. (2008). “Lehman tries to soothe Wall Street with asset sale,” Associated Press, September 10.Google Scholar
Berle, A., and Means, G. (1932). The Modern Corporation and Private Property, Macmillan.Google Scholar
Billett, M., and Xue, H. (2007). “Share Repurchases and the Need for External Finance,” Journal of Applied Financial Economics, 19, 2: 42–55 Google Scholar
Bishop, T. (2004). “Microsoft wants to reduce its cash balance and improve its share price, analyst says; stock buyback may be in the works,” Seattle Post-Intelligencer, June 16.Google Scholar
Blair, M., ed. (1993). The Deal Decade: What Takeovers and Leveraged Buyouts Mean for Corporate Governance, Brookings Institution Press.Google Scholar
Blair, M. (1995). Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, Brookings Institution Press.Google Scholar
Blouin, J., Raedy, J. and Shackleford, D. (2007). “Did Firms Substitute Dividends for Share Repurchases After the 2003 Reductions in Shareholder Tax Rates?,” National Bureau of Economic Research, Working Paper 13601, November.Google Scholar
Blum, J. (2005). “Energy tax breaks total $14.5 billion,” Washington Post, July 28.Google Scholar
Board of Governors of the Federal Reserve System (2008). Flow of Funds Accounts of the United States: Annual Flows and Outstandings, Historical data including latest release on March 6, 2008, available at http://www.federalreserve.gov/releases/z1/Current/data.htm.Google Scholar
Brooks, J., 1973, The Go-Go Years, Dutton,Google Scholar
Bulkeley, W. (1999). “Sycamore Networks’ gain of 386% ranks as the 4th-best IPO performance,” Wall Street Journal, October 25.Google Scholar
Carpenter, M., Lazonick, W., and O’Sullivan, M. (2003). “The Stock Market and Innovative Capability in the New Economy: The Optical Networking Industry,” Industrial and Corporate Change, 12, 5: 963–1034.Google Scholar
Cassidy, J. (2002). dot.con: The Greatest Story Ever Sold, Penguin.Google Scholar
Chaffin, J. (2002a). “SEC launches investigation into Wall Street banks,” Financial Times, April 25.Google Scholar
Chaffin, J. (2002b). “Lawyers agog as the banks spill the IPO beans,” Financial Times, September 18.Google Scholar
Chandler, A. (1977). The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.Google Scholar
Chandler, A. (1990). Scale and Scope: The Dynamics of Industrial Enterprise, Harvard University Press.Google Scholar
Chase, M. (2007). “Amgen cuts mark biotech squeeze,” Wall Street Journal, August 16.Google Scholar
Crutsinger, M., and Zibel, A. (2008). “US government takes over mortgage giants,” Associated Press Financial Wire, September 7.Google Scholar
Crystal, G. (1991). In Search of Excess: The Overcompensation of American Executives, W. W. Norton.Google Scholar
Cusumano, M., and Yoffie, D. (1998). Competing on Internet Time, Free Press.Google Scholar
Dash, E. (2006). “Off to the races again, leaving the many behind,” New York Time, April 9.Google Scholar
Dittmar, A. (2000). “Why Do Firms Repurchase Stock?,” Journal of Business, 73, 3: 331–354.Google Scholar
Dittmar, A., and Dittmar, R. (2004). “Stock Repurchase Waves: An Explanation of the Trends in Aggregate Corporate Payout Policy,” Working Paper, University of Michigan Business School, February.Google Scholar
Domis, O. (2003). “Latitude for change,” Daily Deal, December 1.Google Scholar
Donlan, T. (2000). “Cisco’s bids,” Barron’s, May 8: 31–34.Google Scholar
Editors of Fortune, 1970, The Conglomerate Commotion, Viking.Google Scholar
Fenn, G., and Liang, N. (2001). “Corporate Payout Policy and Managerial Stock Incentives,” Journal of Financial Economics, 60, 1: 45–72.Google Scholar
Forelle, C., and Bandler, J. (2006). “The perfect payday: some CEOs reap millions by landing stock options when they are most valuable; luck - or something else?,” Wall Street Journal, March 18.Google Scholar
Fuller, J., and Jensen, M. (2002). “Just Say No to Wall Street: Putting a Stop to the Earnings Game,” Journal of Applied Corporate Finance, 14, 4: 41–46.Google Scholar
Gimein, M., Dash, E., Munoz, L., and Sung, J. (2002). “You bought. They sold. All over corporate America, top execs were cashing in stock even as their companies were tanking. Who was left holding the bag? You,” Fortune, September 2.Google Scholar
Glimstedt, H., Lazonick, W., and Xie, H. (2006). “Evolution and Allocation of Stock Options: Adapting US-Style Compensation to the Swedish Business Model,” European Management Review, 3, 3, 2006: 1’21.Google Scholar
Goldman, A. (2008). “Wall Street bonuses fell 4.7 percent in 2007,” Associated Press Newswires, January 17.Google Scholar
Gompers, P., and Lerner, J. (2002). The Venture Capital Cycle, MIT Press.Google Scholar
Gordon, M. (2001). “Wall Street to reopen with relaxed rules,” Journal Gazette, September 15.Google Scholar
Griswold, E., 1960, “Are Stock Options Getting Out of Hand?,” Harvard Business Review, 38, 6: 49–55.Google Scholar
Grullon, G. and Ikenberry, D. (2000). “What Do We Know About Stock Repurchases?,” Journal of Applied Corporate Finance, 13, 1: 31–51.Google Scholar
Grullon, G., and Michaely, R. (2002). “Dividends, Share Repurchases, and the Substitution Hypothesis,” Journal of Finance, 57, 4: 1649–1684.Google Scholar
Hall, B., and Leibman, J. (1998). “Are CEOs Really Paid Like Bureaucrats?” Quarterly Journal of Economics, 113, 3: 653–691.Google Scholar
Hays, K., and Ivanovich, D. (2008). “Politicians fume as Exxon profits; Firm buys back $8 billion in shares,” Houston Chronicle, August 1.Google Scholar
Hsieh, J., and Wang, Q. (2006). “Insiders’ Tax Preferences and Firm’s Choice between Dividends and Share Repurchases,” working paper, August, available at http://papers.ssrn.com/sol3/papers.cfm7abstract_id=925350.Google Scholar
Hudson, R. (1982). “SEC eases way for repurchase of firms’ stock,” Wall Street Journal, November 10.Google Scholar
Industrial Union Department, AFL-CIO (1959). The Stock Option Scandal, AFL-CIO.Google Scholar
Jensen, M., 1986, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review, 76, 2: 323–329.Google Scholar
Jensen, M., and Murphy, K. (1990). “Performance Pay and Top Management Incentives,” Journal of Political Economy, 98, 2: 225–64.Google Scholar
Jensen, M., Murphy, K. and Wruck, E. (2005). “CEO Pay… and How to Fix It,” Harvard Business NOM Working Paper No. 04–28.Google Scholar
Jolls, C. (1998). “Stock Repurchases and Incentive Compensation,” NBER Working Paper 6467, March.Google Scholar
Jun, S., Jung, M., and Walking, R. (2008). “Share Repurchases, Executive Options and Wealth Changes to Stockholders and Bondholders,” working paper, Drexel University, June.Google Scholar
Kahle, K. (2002). “When a Buyback Isn’t a Buyback: Open Market Repurchases and Employee Options,” Journal of Financial Economics, 63 2: 235–261.Google Scholar
Knight, J. (1999). “Nextel builds war chest,” Washington Post, November 11.Google Scholar
Ko, K. (2008). “Cautions grow in KIC’s Wall Street stake,” Korea Herald, February 11.Google Scholar
Lazonick, W. (1992). “Controlling the Market for Corporate Control: The Historical Significance of Managerial Capitalism,” Industrial and Corporate Change, 1 3: 445–488.Google Scholar
Lazonick, W. (2003a). “Stock Options and Innovative Enterprise: The Evolution of a Mode of High-Tech Compensation,” UMass Lowell and INSEAD, working paper, August.Google Scholar
Lazonick, W. (2003b). “The Theory of the Market Economy and the Social Foundations of Innovative Enterprise,” Economic and Industrial Democracy, 24 1: 9–44.Google Scholar
Lazonick, W. (2004). “Corporate Restructuring,” in Ackroyd, S., Batt, R., Thompson, P., and Tolbert, P., eds., The Oxford Handbook of Work and Organization, Oxford University Press: 577–601.Google Scholar
Lazonick, W. (2006a). “Evolution of the New Economy Business Model,” in Brousseau, E. and Curien, N., eds., Internet and Digital Economics, Cambridge University Press: 59–113.Google Scholar
Lazonick, W. (2006b). “Globalization of the ICT Labor Force,” in Mansell, R., Avgerou, C., Quah, D. and Silverstone, R., eds., The Oxford Handbook on ICTs, Oxford University Press: 75–99.Google Scholar
Lazonick, W. (2007a). “Economic Institutional Change and Employer Pensions,” in Ghilarducci, T. and Weller, C., eds., Employee Pensions: Policies, Problems & Possibilities, Labor and Employment Relations Association Research Volume: 29–68.Google Scholar
Lazonick, W. (2007b). “Innovative Enterprise and Economic Development,” UMass Lowell Center for Industrial Competitiveness Working Paper.Google Scholar
Lazonick, W. (2007c)., “The US Stock Market and the Governance of Innovative Enterprise,” Industrial and Corporate Change, 16 6, 2007: 983–1035.Google Scholar
Lazonick, W. (2007d). “Varieties of Capitalism and Innovative Enterprise,” Comparative Social Research, 24: 21–69.Google Scholar
Lazonick, W, and March, E. (2008). “The Rise and Fall of Lucent Technologies,” UMass Lowell Center for Industrial Competitiveness Working Paper, July.Google Scholar
Lazonick, W., and O’Sullivan, M. (2000a). “Maximizing Shareholder Value: A New Ideology for Corporate Governance,” Economy and Society, 29 1: 13–35.Google Scholar
Lazonick, W., and O’Sullivan, M. (2000b). “Perspectives on Corporate Governance, Innovation, and Economic Performance,” Report to the European Commission (DGXII) under the TSER Programme.Google Scholar
Lazonick, W., and O’Sullivan, M. (2004). “Corporate Governance, Innovation, and Economic Performance in the EU: Final Report,” Targeted Socio-Economic Research (TSER) Report to the European Commission (DGXII) under the Fourth Framework Programme, European Commission (Contract no.: SOE1-CT98-1114; Project no: 053), May 2002 (published by EU Socio-Economie Research of the European Commission, December 2004).Google Scholar
Lazonick, W., and Tulum, O. (2008). “US Pharmaceutical Finance and the Sustai-nability of the Biotech Boom,” paper presented at the 25th DRUID Conference, Copenhagen, Denmark, June 20.Google Scholar
Lie, E. (2005). “On the Timing of CEO Stock Option Awards,” Management Science, 51 5: 802–812.Google Scholar
Louis, H., and White, H. (2007). “Do Managers Intentionally Use Repurchase Tender Offers to Signal Private Information? Evidence from Firm Financial Reporting Behavior,” Journal of Financial Economics, 85 1, 205–233.Google Scholar
Mayer, D., and Kenney, M. (2004). “Economic Action Does Not Take Place in a Vacuum: Understanding Cisco's Acquisition and Development Strategy,” Industry and Innovation, 11, 4: 299–325.Google Scholar
McCarthy, E. (1999). “Stock Buybacks: The Rules,” Journal of Accountancy, May: 91–97.Google Scholar
McNamee, M., and Scherreik, S. (2003). “What the cuts mean to you,” BusinessWeek Online, May 30.Google Scholar
Moore, H. (2002). “High stakes in N.Y. suits over IPOs,” National Law Journal, April 22.Google Scholar
Mowery, D., Nelson, R., Sampat, B., and Ziedonis, A. (2004). Ivory Tower and Industrial Innovation: University-Industry Technology Transfer Before and After the Bayh-Dole Act, Stanford Business Books.Google Scholar
National Research Council (1999). Funding a Revolution: Government Support for Computing Research,National Academy Press.Google Scholar
Nguyen, T. (2001). Cisco’s ＄3bln stock buyback may usher in other plans,” Reuters News, September 14,Google Scholar
Niland, P. (1976)., “Reforming Private Pension Plan Administration,” Business Horizons, 19 1: 25–35.Google Scholar
O’Reilly, C, and Pfeffer, J. (2000). “Cisco Systems: Acquiring and Retaining Talent in Hypercompetitive Markets,” Human Resource Planning, 23 3: 38–52.Google Scholar
O’Sullivan, M. (2000). “The Innovative Enterprise and Corporate Governance,” Cambridge Journal of Economics, 24 4: 393–416.Google Scholar
O’Sullivan, M. (2002). “Corporate Control,” in Lazonick, W., ed., The IEBM Handbook of Economics, Thomson: 129–55.Google Scholar
O’Sullivan, M. (2004). “What Drove the US Stock Market in the Last Century?,” INSEAD working paper, May.Google Scholar
O’Sullivan, M. (2007a). “Funding New Industries: A Historical Perspective on the Financing Role of the U.S. Stock Market in the Twentieth Century,” in Lamoreaux, N. and Sokoloff, K., eds., Financing Innovation in the United States, 1870 to the Present, MIT Press.Google Scholar
O’Sullivan, M. (2007b). “The Deficiencies, Excesses and Control of Competition: The Development of the US Stock Market from the 1930s to 2001,” in Galambos, L. and Fohlin, C., eds., Balancing Public and Private Control: Germany and the US in the Postwar Era, Cambridge University Press.Google Scholar
Patton, A. (1988). “The Executive Pay Boom is Over,” Harvard Business Review, September-October: 154–155.Google Scholar
Pierson, J. (1978). “Trend of higher levies on capital gains is reversed as President signs tax bill,” Wall Street Journal, November 9.Google Scholar
Piller, D. (2006). “Exxon Mobil sets record for profits,” Fort Worth Star-Telegram, January 31.Google Scholar
Rapoport, M. (2001). “Stock buybacks could help bolster market when it reopens,” Dow Jones Business News, September 1.Google Scholar
Rappaport, A., and Sirower, M. (1999). “Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions,” Harvard Business Review, November-December: 56–58.Google Scholar
Rayburn, F., and Powers, O. (1991). “A History of Pooling of Interests Accounting for Business Combinations in the United States,” The Accounting Historians Journal, 18 2, December: 155–92.Google Scholar
Rizzo, P., and Bel Bruno, J. (2008). “Meltdown in US finance system pummels stock market,” Associated Press Online, September 16.Google Scholar
Romano, B. (2006). “Microsoft CEO Ballmer defends spending increase,” Seattle Times, May 2.Google Scholar
Seligman, J. (1995). The Transformation of Wall Street, revised edition, Northeastern University Press.Google Scholar
Shiller, R. (2000). Irrational Exuberance, Princeton University Press.Google Scholar
Shleifer, A., and Summers, L., 1988, “Breach of Trust in Hostile Takeovers,” in Auerbach, A., ed., Corporate Takeovers: Causes and Consequences, University of Chicago Press: 33–56.Google Scholar
Souder, E. (2008). “Exxon’s 17% gain disappoints, irritates,” Dallas Morning News, May 2.Google Scholar
Story, L. (2008). “After a rough year, nearly half of Wall Street bank profits are gone,” New York Times, June 16.Google Scholar
Teather, D. (2002). “‘Flipping’ Goldman fingered,” Guardian, October 4.Google Scholar
Tufano, P. (1993). “Financing Acquisitions in the Late 1980s: Sources and Forms of Capital,” in Blair, M., ed., The Deal Decade, Brookings: 289–320.Google Scholar
US Congress (2008). Economic Report of the President 2008, US Government Printing Office.Google Scholar
Vermaelen, T. (2005). Share Repurchases, now Publishers.Google Scholar
Vickers, M., and France, M. (2002). “How corrupt is Wall Street?,” BusinessWeek, May 13.Google Scholar
Wallman, S, Wallman, K., and Aronow, G. (1999). “Pooling-of-interests Accounting and High Growth Economy Companies,” Submitted to the Financial Accounting Standards Board, December 7 (http://www.wallman.com/pdfs_etc/fasb.pdf).Google Scholar
Warner, M. (2000). “Friends and family: Sycamore gave lots of ‘directed shares’ to a key customer,” Fortune, March 20.Google Scholar
Weisbenner, S. (2000). “Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play?,” FEDS Working Paper 2000–29, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=234164.Google Scholar
Williamson, O. (1985). The Economic Institutions of Capitalism, Free Press.Google Scholar
Williamson, O. (1996). The Mechanisms of Governance, Oxford University Press.Google Scholar
Zhu, C. (2007). “Global ambition behind CITIC’s Bear Stearns deal,” Reuters News, October 22.Google Scholar