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November 23, 2008

Common Stock: Could It Be Introduced Today?

Great musings from Steve Randy Waldman tonight about the future of financial innovations. While, Steve, like me, generally believes that there is ample room remaining in financial markets for innovations, he also concedes that there is good financial innovation and there is bad innovation. With that in mind, he argues, fairly entertainingly, that common stock -- despite its ubiquity -- belongs in the "bad innovation" camp:

No rational regulator concerned with substantive transparency would approve of common stock, if it were a novel investment vehicle. It guarantees no cashflows whatever, its "control rights" are so weak for most purchasers that representations thereof should be viewed as fraudulent. Empirically common stock behavior is very weakly coupled to the performance and health of the firms that stocks fund. The only instrument in wide use more substantively opaque than common stock is fiat money.

Great points. Maybe common stock, like aspirin, couldn't be launched today. More here.

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