Monday, February 15, 2010

Link between stock market speculation and corporate bankruptcies

Confronted to the speculation we observe in financial markets, I began a series of columns on the ravages of financial capitalism. In the first, I demonstrated the harms of speculation, especially the relationship between it and the economic and financial crisis raging on the planet since summer 2007. In the second, I talked about the birth and evolution of capitalism and oft he stock market, and compared two forms of investment in a high tech company. In this third column, I present the financing needs of companies involved in technology. Of course, these findings also prove accurate in other sectors of economic activity.

I have already outlined the fact that today technological development requires massive injections of capital, available only to States and major financial players, such as banks, mutual funds and a few wealthy investors, amongst whom we find both entrepreneurs and speculators. Small technology companies are struggling to find capital for their development; they rely on state subsidies, bank loans, venture capital and a few private investors. When they reach a certain size, they seek to get listed on the stock market through an IPO; from then on, they are subjected to the dictates of investors demanding an increased profitability year after year. Failure to deliver will cause their shares to be dumped, their capitalization diminished and their development compromised.

Several flourishing companies have disappeared over the years. Even large companies, sometimes listed on the stock market for decades, are vulnerable; some have collapsed, their shares sometimes dropping from hundreds of dollars to a few cents. Consider Norton Telecom (Nortel) a jewel high-tech company in Canada. Market speculation is perhaps not the only culprit in Nortel’s bankruptcy, but it is a major factor. Without the excessive demands of some large investors with respect to a short-term excessive profitability, business decisions made by management would probably have been different; they would have been better suited to a more harmonious long term development of the company. Companies, technological or otherwise, should not have to finance through the stock markets and see their business decisions dictated by a handful of speculators who care only about their own short term profit, often at the expense of the company itself.

What other avenues might there be? I have already said that technological development can take place in a capitalist type economic organization, while remaining beneficial to society as a whole. However, to remain the privileged method of economic organization, capitalism must transform, be associated with State imposed social measures, and above all eliminate, or at the very least restrict, speculation. This new paradigm is already emerging in the form of responsible capitalism and new values; in my next column, I will present its broad outlines.

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