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

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  • William Lazonick

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 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. JEL Codes – L20.

Suggested Citation

  • William Lazonick, 2008. "The Quest for Shareholder Value: Stock Repurchases in the US Economy," Recherches économiques de Louvain, De Boeck Université, vol. 74(4), pages 479-540.
  • Handle: RePEc:cai:reldbu:rel_744_0479
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    References listed on IDEAS

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    Cited by:

    1. Driver, Ciaran & Guedes, Maria João Coelho, 2012. "Research and development, cash flow, agency and governance: UK large companies," Research Policy, Elsevier, pages 1565-1577.

    More about this item

    Keywords

    stock market; innovative enterprise; shareholder value; stock repurchases;

    JEL classification:

    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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