The Dividend Problem: Are Shareholders Entitled to the Residual

Abstract

Using the familiar economic model of the firm, I show that shareholders have no special claim on a corporation's economic returns. No one has an entitlement to economic rents in a capitalist system. Shareholders, the purely fungible providers of a purely fungible commodity, are particularly unlikely to be able to command a share of economic profits. Indeed, since the contribution of shareholders to the firm is a sunk cost, in a competitive market shareholders are unlikely to earn any return at all. Accordingly, market-based analyses of the firm should conclude that shareholder returns result from a market distortion. Similarly, black-letter legal doctrine makes clear that shareholders are not owners or principals and have no legal claim on corporate assets.

The implications are clear: shareholders win much of the corporate surplus not by market right or moral entitlement, but due to a (possibly temporary) ideological victory in a political battle over economic rents. Surprisingly, since corporate law often assumes a conflict between shareholders and top management, shareholder gains are more likely the result of the usefulness of the share-centered ideologies in justifying a tremendous shift of corporate wealth from employees to an alliance of top managers and shareholders.

Standard accounts conceal the struggles over corporate surplus and the weakness of shareholder claims to appropriate it. Taking the political nature of the corporation seriously, in contrast, will lead to a series of new and important questions. Why should only one side in a political conflict have the vote, and why should a democracy allocate votes per dollar instead of per person?

Keywords: shareholders, corporate governance, rents, shareholder supremacy

JEL Classification: D22, D33, D72, G12, G34, J58, J38, K22