77 Pages Posted: 7 Oct 2011
Date Written: October 5, 2011
This article answers, in the affirmative, two core research questions: do we need long-term shareholders and can we find them? The economy needs long-term shareholders to provide prudent and profitable patient capital, generate an antidote to corporate short-termism and spearhead managerial accountability. Finding these shareholders requires a structure that provides the right environment and incentives for such investment. The article presents a novel application of the trust fund theory – the dominant philosophical paradigm of American corporate finance in the 19th century – as a vehicle for stimulating long-term shareholding. The central features of the reformulated trust fund theory include the creation of relatively illiquid trust securities, a permanent fund financed by the sale of the securities, and long-term shareholders who, in exchange for less liquidity, receive an enhanced voice in corporate governance. Apart from addressing the need for long-term shareholding, the revised trust fund theory will also serve the additional functions of providing creditor protection and assuring regulatory compliance.
Keywords: trust fund theory, patient capital, short-termism, long-term shareholder primacy, illiquidity, share transfer restrictions, bonds, exit, voice, monitoring, creditor protection, agency costs
JEL Classification: G30, K22, L51, M14, N20
Suggested Citation: Suggested Citation
By David Walker