2013 Millstein Forum: The Function of an Efficient Market

Judith F. Samuelson

Judith F. Samuelson

Function of an Efficient MarketThe following are cryptic notes and a few photos taken at the 2013 Millstein Forum held June 24 & 25 at Columbia Law School. Be sure to check out the Forum’s photo gallery. Moderator: Judith F. Samuelson, Executive Director, Aspen Business and Society Program, Aspen Institute.

Supply chain compared to investment chain. Intermediaries have their own needs and desires. Large investing institutions control about 70% of the market.  OECD revised principles.

Serdar Celik

Serdar Celik

IPO downtrend in OECD vs uptrend in non-OECD countries. Shift from advance markets to emerging doing IPOs in OECD markets, now doing IPOs in their own developing markets. Many non-financial companies are now cash rich. No problem finding capital for large companies. IPO size has doubled in last 10 years.

High frequency traders trade primarily large companies. Mid and small companies actually traded less in last 10 years. We are moving toward passive indexed-based investing. Function of efficient market is to allocate capital (no longer functioning smoothly?) but we can identify long-term corporate growth.

Thomas Palley

Thomas Palley

Value of company.  1/2 of economy is growing slower than the discount rate. 25% of the variance in stock price due to global effects (currently exchange, 25% local factors, 25% industry, 25% due to company itself. Are we measuring companies or investor expectations? Corporations have a much broader purpose than simply earning money for shareowners… to contribute to the delivery of shared prosperity. The structure of financial markets has been undermined. Pre-1980 wages led. Productivity grew wages. basic transaction services. savings for future needs. There was a strong link between productivity and rise in income.

Finance took control of American business based on the rationale of maximization of shareholder value. They abandoned their traditional commitment to country. We should be rebuilding the wage productivity link. We need to put finance back in the box. Take money out of politics. Change corporate behavior. Regain control of financial markets.  Fed reserve should refocus on full employment. Limit speculation. We need a financial transactions tax. System-wide asset based reserve requirements. Shareholders need to have strong rights. It is a myth that insulating boards creates long-term value.

Need to believe that long-term players will buy from hedge funds two years from now. Cited Bebchuk, Lucian A., Brav, Alon and Jiang, Wei, The Long-Term Effects of Hedge Fund Activism (July 9, 2013), which examined the claim that hedge funds,have an adverse effect on the long-term interests and finds that it is not supported by the data.

The market does not fail to appreciate reforms made by hedge funds. Looked at returns 3 years after hedge fund liquidated and found no adverse effect. Companies targeted by activists suffered no more than others during financial crisis. 25% delisted voluntarily. Trust in stock markets is at a low, even less trust than in banks. Controls may have made it worse.
Discussed distribution of income and concentration of wealth. Macro-economic story. People are focusing on number of IPOs; that’s a mistake. Public market is insiders holding other people’s money. Yes, their is more private equity. Many public equity firms are taken private and go back to public. Average size of IPO doubled in US. Very small supply of equity coming by private equity.
Recursive systems are cyclical. New regulations won’t fix the problem. Capital markets should be seen as mechanisms, not for putting money in, but for getting money out of companies. There is a massive outflow. Even if activism increases shareholder value what does it do for society, workers? We are not incentivizing CEOs around whole company.. just share price. The markets are distorting our entire society. Put finance back in the box. Legislate change in purpose. Constrain choice set.

Supplementary materials:

  • Isaksson, Mats and Serdar Celik.  Who Cares? Corporate Governance in Today’s Equity Markets OECD Corporate Governance Working Papers. April 2013. Click here to view.
  • Palley, Thomas I. Financialization: What it Is and Why it Matters.  Political Economy Research Institute.  Nov. 2007.  Click here to view.
  • Roxburgh, Charles, Susan Lund et. al.  The Emerging Equity Gap: Growth and Stability in the New Investor Landscape. McKinsey Global Institute. Dec. 2011.  Click here to view.

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