The High Cost of Being Public
This recent New York Times article titled Public Companies, Singing the Blues reminds us that marketplace structures will modify to accomodate barriers -- be they legal, social, environmental, etc.:
Why can buyout firms take public companies private and make enormous returns, while the same type of returns seem out of reach for public companies and their shareholders? He went on to posit that private-equity firms were essentially arbitraging the public markets and "are appropriating profits that should belong to public shareholders."The question drew scorn from most people in the room, but, then again, people also whispered at their tables that he wasn't so wrong. That's exactly what private equity firms do.
Incentives exist, and entitites respond to incentives: plants grow toward the light, making the strike zone smaller increases the annual salaries of home run hitters, and tolls reduce congestion in Londontown.
So whether we are talking about people, firms, or marketplaces, a change in the form or the structure of the incentives and influences that bear on that entity will lead to a concommittant change in that entity's behavior or situtaitonal outcome.
So the ultimate effect of Sarbanes Oxley punishing public companies is to create a much larger private market. The purchase of common equity will be decreasingly likely to occur through the action of an individual in the United States purchasing for their own account on a public, regulated market; and will increasingly take place through aggregated pools of capital of individuals acting as agents -- such as pension funds, supra-aggregated into principal pools of capital -- such as hedge funds and LBO shops -- in order to avoid the deleterious effects on company management and resources of government regulations.
The implications of this are mixed overall. On the one hand, no individual should be acquiring the undiversified asset that is a single common stock -- nowhere under any legitimate circumstances is this a wise allocation of resources. So to the extent that Sar-Ox successfully drives American shareholders out of indiviudal equities by drying up the purchase opportunities for those equities, it is a good thing.
On the other hand, private equity marketplaces, while ultimately efficient, have much, much greater transaction and information costs. Information is hidden for years at a time, which abets non-efficient behavior like "prettying up the asset for sale." And transaction costs for determining a market-clearing price are enormous -- investment bankers, not just the Devil, wear Prada. On the weekends at least.
So it is enormously fascinating to see (once again), the good intentions of legislation lead to the unintended consequence of transferring wealth from one group of stockjobbers (brokers, financial consultants, etc.) to another (LBO and private equity shops).
One would think Congress would have more rewarding areas in which to seek glory.
