Come to think of it, those who assume that a mandatory 1% issuance of new equity by a company will result in devaluation of per share or dividends per share of existing stock by 1% are not necessarily right.
For the baseline we would have to assume that a company's self-directed secondary issuance of shares will lead to a static decrease in stock valuation proportional to the amount of new stock. I've been trying to find information on this point, but it just doesn't seem to work like that because markets and pricing are not static - they follow from the intuitions and expectations of the investors. In fact the expectation is often that equity will grow in value following an offering on account of growth potential or bullish spirit or whatever. For example in 2005
Google's secondary offering "the stock had climbed 6.3 percent since the company announced plans to sell the additional shares, even though they will dilute current holdings." We must understand that changes in valuation are not static or linear and are probably unpredictable beyond a case-by-case basis. It is especially fallacious to assume that new stock somehow represents a static decline in
long-term valuation.
Dividends: The companies' directors calculate dividends to be paid from earnings (profits) according to their own strategy; there is no precept to maintain the same payout ratio. If a company has been distributing a certain percentage of earnings across a certain number of shares annualized, then each year for 10 years as they add 1% to the IOF they can increase the payout ratio to prevent relative dividends dilution (not counting any matching for new standard or converted stock available on the market). Alternatively, if a company and its investors have not otherwise felt the need to stabilize dividends against standard shares growth, then why would investors hold it against them now? (As an example,
Walmart has raised its dividend every year since it first offered them 40-ish years ago, and currently its payout ratio is 43.18%.)
Stock Price: As
this page explains, the stock price is fundamentally linear to the market capitalization of the company. The actual price of a share is determined on the market, where it is bought and sold according to perceptions of the company's strength: e.g. its cash flow or subjective growth potential. It is true in abstract that since new stocks are generally offered for below the existing market price of shares, the immediate effect of selling new shares is to increase the market capitalization of the company on a lower per-share basis. In other words, the ratio of market cap to outstanding shares decreases in the immediate aftermath, which in theory would reduce the value of shares. However, as stated above the market does not stand still on prices making a linear equation unrepresentative.
What you might notice is that new issuance for the IOF is in effect a special category of shares: it is is never available on the market. If a share does not exist and
cannot exist on the market, and its ownership is automatically locked in yet also does not add to or subtract from the capitalization of the company, then there is little reason I can see for the market to take this issuance into consideration in pricing shares of the company. This is doubly true when one remembers most stock-issuing companies would be affected in the exact same way at the exact same time - by
law.
There is one caveat I can detect. While government-mandated locked-in stock issuance off the market should not affect the prices of the stocks directly, they can eventually affect them indirectly. The IOF plan requires IOF-held stock to be remunerated with dividends to workers in the form of cash. Because paying shareholders cash decreases the amount of cash available to the company, the act of paying dividends in itself can be said to act as a downward-pressure on stock. In practice companies are required to announce record dates on which dividends are paid, and in the window leading up to this date the company stock becomes a popular short buy from people who want to turn a profit by picking up the dividend check against the shares but don't want to hold on to the shares long-term. Therefore the stock price often increases comparable to dividend size leading up to the record date, but is then dumped following this date leading to a reversion (drop of stock price). There could conceivably be a discrete downward pressure from the paying of dividends against IOF shares that have no market presence or price yet extract money from the company. But the magnitude of this theoretical vector should resemble the typical effect of labor costs on a company's valuation, since IOF dividends are effectively just a labor cost. Investors traditionally don't like labor costs because they expect the company to transfer the value of labor from the laborers to the investors.
This is a primary dynamic of the capitalist economy that leftists most heavily criticize and desire to disrupt!!!
So in fact any impact on company financials and financial markets from the IOF plan's dividends (as separated from the corporate income tax aspect since that's a different thing) must be categorically similar to legislative interventions such as the minimum wage, and any argument against leftists that their plans transfer value from capital to labor is bound to fail - that's the point of the intervention! The only real question is the effectiveness and efficiency of a proposal in achieving its goals compared to some other proposal. In that vein here are what I would consider interesting and relevant questions about the IOF plan:
Why combine a rise in
ordinary corporate income tax rate with collecting most of the dividends from the IOFs as a secondary hidden corporate tax (the vast majority of IOF capped dividends would flow to the government)? Why not consolidate the IOF as a workers' participation measure and apply any new corporate tax distinctly, and perhaps in collectible form through the issuance of special non-voting shares as per Dean Baker's proposal? A potentially easier way to accomplish the distinct goal of transferring more corporate money to workers could be to modify wage/employment law to require all applicable companies pay a bonus equal to 10% of dividends from UK profits, whether or not capped at £500. Also, Employee Ownership Trusts were introduced in 2014 but apparently haven't seen much uptake - could those structures be modified to achieve some of the employee ownership goals without mandatory transfers? Employee participation goals could in part be met by Labour's existing Germany-style codetermination proposal.
In the current IOF plan is there a mechanism for establishing IOFs at new companies? Of all questions this one is probably already answered - I'd bet on a continuing requirement to transfer 1% where applicable up to the 10% cap - but I can't recall locating what happens to companies that begin to fall into the criteria following the first tranche of IOF transfers. Without such a mechanism the full 10% IOF would only apply to companies that meet the criteria on the day of implementation and continue to meet the criteria for 10 years. Inversely, what happens to companies that fall below the employment threshold having already established an IOF?
What are the mechanisms for collective management of IOF within a company? Is governance participatory or delegatory? Is there an expectation for how IOF managers will participate in corporate governance? For instance, since the IOF is capped the IOF has neither ability or incentive to grow itself. What kind of decision-making are IOFs predicted to engage in?
Should workers be able to sell their stake in IOF, or to their entitlement to dividends from IOF? While a dividends cap cuts against inequality between workers, that most workers aren't covered by IOFs and there is lack of flexibility with respect to IOF rights in taking or leaving these jobs on the other hand increases inequality between workers.
What happens with companies that are already cooperatives or employee-owned? What about existing partially employee-owned companies? And large companies that don't pay dividends?
Does anything happen to existing individual employee stock in their own/other companies? What about convertible securities, stock options and warrants? Are C-suite and upper management employees covered by IOF?
When the plan mentions "workers" does that include only employees or contractors and temporary workers as well? The dividend structure seems problematic in application to workers of more detached categories; they don't have as much skin in as full employees, and anyway is there a risk their hiring/firing could be organised around record dates for payment of dividends?
You're in favour of this preposal simply because it fits your ideology - the fact is it's still ill thought out.
Does the government have any ownership policies targeting all the many classes of workers who are not self-employed but still work for small/medium companies?
What are estimates of distortion effects around (above/below) the 250 worker threshold? How will subsidiaries be treated compared to branches?
I'm tired of learning about the UK, and I have to take time to familiarize myself with the
below local election issues by Tuesday so please take a few days to carefully consider any response.
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