Posted by: graemebird | July 29, 2009

Efficient Market Theory: The Dovetailing Effect Of Debt-Financing, Monetary Instability And The Company Tax On The Effectiveness Of Capital Allocation.

Now on another note. Its not the case that corporations are given legal rights and equality with actual human beings. They are given SUPERIOR treatment under the law. Since they have limited liability. Whereas a real person is subject to bankruptcy laws the artificial person has superior legal standing. This is a violation of the principle of equality before the law.

I argue for a myriad of reasons that limited liability ought to mean 100% equity finance. Which I believe would help equalize persons both real and artificial, before the law. It would help do a number of other things as well. Not all of which are included in this link.

We see that this would improve share pricing and therefore capital allocation. We see also that it would harmonise more the interests between management, shareholders and the wider society.

Wherein companies were 100% equity financed, monetary policy was based on reason and if there was no company tax on retained earnings, then a lot of the artificial volatility would be taken out of the share market. Also the goals of the management would be more unambiguously to create shareholder value. Which would then be identical to wealth creation more generally.

People might think that the above is a prosaic reality even now. This is not the case. The combination of gearing, monetary un-predicatability and company tax makes rational top decision-making impossible and not in keeping with the goal of increasing both societal wealth and shareholder value at the same time. Hence the current setup does not appear to be consistent with how capitalism is supposed to work.

There has been a lot of talk about efficient market theory lately. But the combination of company tax, gearing, and unpredictable future monetary policy…… this evil troika would make it impossible to value a company EVEN IF YOU WERE GIVEN ALL FUTURE REAL CASH FLOWS BY THE GYPSY WITH AN OFFICE IN TOWN.

Theorists who deal with efficient market theory don’t seem to have noticed this. We don’t have an efficient market. Why would we? We are not free enterprise and it appears that capitalism properly considered is how I would envisage it, if efficient share pricing is anything to go by.

One of the costs then, of not separating limited liability from debt financing …… one of the costs to society is less effective (or “efficient”) capital allocation. And another cost is a great deal of the winnings of many thousands of skilled and intuitive market players. Since as everyone knows the closer a market is to being “efficient” the less money there is for such people to take off the table.

Its at least possible that the above theoretical observation to do with efficient market theory may be original to me.



  1. Logged moderated post

    “Public companies are actually NOT spending other people’s money……”

    This is conceptual confusion. Managers in that company ARE INDEED spending other peoples money.

    “… and other people don’t have a direct claim to that money……”

    You mean their cash on hand? The shareholder owns proportion of the company. The shareholders together own the company entire. The managers are spending funds gained ultimately from creditors or shareholders.

    Hence Homer is quite right. You and Jason ought not spin out of control like this and gainsay Homer for no reason.

    The difference is that the government spends money that is stolen. Whereas TO SOME DEGREE OR OTHER the actions of business represent freedom of association.

    To the extent this is NOT true then the managers might well start acting like politicians.

    I can’t go into a public company as a shareholder and simply demand my share of the money. It’s not mine directly.

  2. Hi Graeme, I followed your link. It’s an interesting article and an interesting subject. I’m not sure I agree that limited liability companies should be legitimate only if they refrain from debt financing. Perhaps with a free banking/finance sector there would be much more cautious lending in any case and so some of the problems of today would not be.

    Thought you might find the following interesting:

    Do follow the link to Long’s article and again in Part 2 (linked at the bottom). All interesting stuff. I can see arguments on both sides and each talking past the other and even being slightly disingenuous in order to make a strong case.

    One thing seems clear – libertarians ought not to be shills for big business. We can only speculate how any particular business would fare in a free society (or indeed how much they’d have to change their ways).

  3. Thanks for the link. I’ll bring other relevant threads to the front so you can see a bit more of my case. I’ll do it tomorrow.

  4. Logging some moderated posts:

    Your comment is awaiting moderation.
    Its just a fact that mergers and aquisitions are or were on the whole wealth-destroying activities. Why run away from this fact?

    The rest of your analysis is wrong too. Managers in public companies do indeed spend money not their own. Its the firms money you say. But the firm is owned by the shareholders. And so its not the managers money.

    So in this case you are wrong again and on this point Homer is right.

    “Do you agree with the baboon, Bird? Do you? ”

    What you mean his entire case? No. And stop lying that I do. Or you’ll have to cringe behind your wife again.

    30 Jul 09 at 4:48 am
    Your comment is awaiting moderation.

    I SEZ:

    Homer pointed out that large Mergers and Acquisitions tend on the whole to be wealth-destroying activities.


    Homer pointed that out and the intellectual baboon is wrong. Perhaps you also need to ask him what he means by wealth destroying seeing you agree with him.

    I SEZ

    This is or was a statement of fact.

    So I’ll point it out again. THIS IS OR WAS A STATEMENT OF FACT.

    Why is Cambria running away from reality? Does Cambria have some new information: that what was once a general truth has CHANGED?

    Perhaps it has. But supposing this WAS true and IS no longer true? Homer would still have a point. In that it would show managers spending other peoples money wastefully.

    Once again it remains true that managers spend money not their own. The firms money Cambria sez. But the firm is owned by shareholders. Hence every dollar that the manager spends is someone elses money. Money not there own. Which is in accordance with the Friedman speculation.

    I’ve already said what I think. I posted the Rozeff link. And also from another angle I have said that stolen money tends to be spent wastefully. You will get nowhere lying about what I am claiming Cambria.

  5. Your comment is awaiting moderation.
    “Hint, Sinclair did not at any point that I can see say that there is a difference between govt and public companies when it comes to OPM.”

    I wasn’t disputing anything Sinclair said here. There is just a bad habit to charge ahead in some extrapolating guess-work as to what the other fellows entire case is. And perceiving that the other fellows WIDER CASE is wrong, whether correctly or incorrectly, there is this bad habit of automatically trying to gainsay every statement of the other fellow.

    This is the “logic” of primitives. Always one ought to clarify what is true and what is false or what at least is a fair point, in each constituent part of the argument.

    Now pretty early on I admitted that Homers statement that Mergers and Acquisitions tended to be wealth-destroying activities…… early on I admitted that this might have been a thing of the past. It might not be a valid statement currentlt. When the Peters book came out with the chapter “Stick To The Knitting” it may have been valid way back in that time period. The time period of RJR Nabisco as Homer mentioned.

    We’ve had a lot of bubbles since the Volcker crunch and M&A in those days might have been just another bubble.

    Was it a bubble? The fact that most of these M&A’s of at least that time were wealth-destroying? Or was it an example of rife management agency?

    We might conclude if it turns out the bad M&A’s were a passing phase, and that most of the rest of the time they are economically sound …… we might thereby conclude that it was another bubble in line with Austrian theory.

    But either way it was a sound point for Homer to make. And it ought to have been taken with an open mind while the wider case was more patiently pulverised all in good time.


    “Rand V. Araskog, Chairperson of ITT Corporation, has recently written a book, The ITT Wars: A CEO Speaks Out on Takeovers. Araskog reports that in 1983, Jay Pritzker and Philip Anschutz were interested in gaining control of ITT through a leveraged buyout. The actual financial details are of little consequence here. Suffice it to say that the “deal” would have involved several transactions.

    Among other things, ITT’s senior management would be given a 10 percent stake in the new company. This stake would have garnered Araskog some $30 million or so. Araskog explains in this book that he perceived this $30 million windfall to be little more than a gargantuan bribe.”

    Agency? The expectation thereof? And if so would there be less agency where there was no company tax, growth-deflation in money, and ltd liability meant 100% equity finance?

    Would these conditions lead to less agency and corporations that acted more fully in keeping with the principle of freedom-of-association. Where the shareholders were not only owners but treated as such. Where the behaviour of management reflected the character and wishes of the founders, the articles of association, the interests of the shareholders, and very little else?

    I think that 100% equity financing is more in keeping with these principles. So from here on in I’m likely to advocate it until something arises to suggest otherwise.

    Also you would not normally expect corporations to donate to political parties. Since this would not normally represent freedom of association of the shareholders many of whom might really loathe the recipients. So the law ought to reflect this sort of thing too I think.

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