When Corporations Pretend To Not Care About Money

In 1919, the Michigan Supreme Court explicitly bound Henry Ford to the notion of shareholder wealth maximization primacy when it held that Henry Ford couldn’t decline to pay the Dodge Brothers special dividends in the pursuit of employing more Detroit auto-laborers.

Henry Ford showed up in court and started talking about the embarrassment of profits that he had made from Ford’s explosion and discussed how it had become time for him to do his part to help “men…build up their lives and their homes.” In testimony, Ford did absolutely nothing to link the desire to employ more people into a belief that greater profits awaited shareholders down the line. For that reason, Ford was ordered to pay a dividend to the Dodge Brothers, as the Court reasoned that the corporate form was not the proper vehicle for advancing ends unrelated to shareholders.

Continue Reading!

The Downside of Stock Splits

As I get older, I find myself coming around more and more to Warren Buffett’s view that stock splits are not something to view favorably. Everyone knows that the mechanics of a stock split don’t themselves create wealth; they just take alter the number of shares outstanding to alter the share price while keeping the common stock economic interest the same.

Despite this, I maintained a lukewarm positive view towards stock splits because the desire to split a stock usually signals some type of management belief that earnings will be rising at a nice clip in the near-term future. It’s irrational, but it causes a lot of psychological tumult for investors to see a stock do a 2 for 1 split and then fall 50% in value (if Chevron had done a 2 for 1 split in 2014 when it crossed $100, then a 100 share position at $100 would have become a 200 share position at $50. When the oil slide hit, the price of the stock could have gone to the $20s, which wouldn’t have been in keeping up with appearances).

Continue Reading!