The Quest for Shareholder Value: Stock Repurchases in the US Economy, by William Lazonick, University of Massachusetts Lowell, December 2008
ABSTRACT 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 shareholder-value 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.
The link address is: http://www.uml.edu/centers/CIC/Lazonick_Quest_for_Shareholder_Value_20081206.pdf