By William Lazonick *
In my research on innovative enterprise and sustainable prosperity, I use the “theory of innovative enterprise” to examine how modes of corporate finance—founder investments, private placements, initial public offerings, retained earnings, secondary stock issues, employee stock options, short-term debt, long-term debt, derivatives—support or undermine the three social conditions of innovative enterprise: strategic control, organizational integration, and financial commitment. In this paper, I focus on the role of the stock market in corporate finance, arguing that, in the United States, the New York Stock Exchange (NYSE) and the National Association of Security Dealers Automated Quotation (NASDAQ) system have functioned far more as value-extracting institutions (draining issuer companies of cash distributed to shareholders) rather than value-creating institutions (providing issuer companies with cash to invest in productive capabilities). As an Important example, I delve into how Apple Inc transformed from one of the most innovative companies in history to one the most financialized ones, reflecting a widespread change in the US economy from corporate innovation to corporate financialization. The stock market has become an institution that supports “predatory value extraction”—most impactfully manifested by the phenomenon of stock buybacks done as open-market share repurchases. I conclude with brief statements of three major lessons related to economic ideology, economic performance, and economic policy that one can learn from my study of corporate finance in the theory of innovative enterprise.
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