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Sophie Bucci
Sociology 351: Sociology of Finance
5/7/14

An Investigation of the Barnesian Performance of Shareholder Value Theory through
Leveraged Corporate Takeovers

Introduction & Performativity

Shareholder value theory (SVT) is a normative theory restricted to the realm of business that
purports that the main goal of any publicly-owned corporation is to increase the wealth of its
investors by returning dividends or increasing share prices. Currently it is the most widely
accepted interpretation of the purpose of a corporation, and it manifests itself in the practice of
judging corporations based on their share prices. Some who study the theorys adoption
conflate the theory and practice of SVT (or take the practice as automatic confirmation of the
theory)
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, but for the purposes of this paper, it will be important to distinguish between them.
While investigating the relationship between SVT and the rise of junk-bond-financed
corporate takeovers during the 1980s, I encountered a disconnect between literature
contending that SVT was a motivation for takeovers (or, at least, that takeover artists claimed it
was) and literature citing the takeovers as a key credible threat that forced corporate managers
to institutionalize SVT. If both of these perspectives are correct that is, if takeover artists
both accepted the assumptions of SVT, and, by acting based on them, altered the world to
better conform to SVT then SVT could be said to be performed by corporate takeovers
analogously to Donald MacKenzies Barnesian performativity.
He defines this as a phenomenon where practical use of an aspect of economics makes
economic processes more like their depiction by economics (MacKenzie 2008, 17). One of his
examples is the 1973 Black-Scholes equation for pricing options (the ability to buy a financial
asset for a set price in the future), which simplified market conditions by adopting several
assumptions one was that there were no transaction costs to buying, selling, or exercising an
option. The equation diffused from academia to the financial world (much like I will argue
pillars of SVT, like agency theory, did) until it was used on trading floors to price options. The
ability to concretely price options helped inspire investor confidence, creating a bigger and
more liquid market for the instruments. As a result, brokers could do greater volumes of trades
and needed to charge less for each one transaction costs could be lowered. In this case, the
models assumption was realized through widespread use of the model.
In this paper, I consider SVT as the aspect of economics that motivates a leveraged
corporate takeover, which in turn makes the process of determining corporate governance
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more shareholder-centric (in other words, more like its depiction by SVT). While the argument
that takeovers caused a rise in SVT is intuitive and well established in the sociological and
economic literature, I aim to more closely examine evidence that SVT caused takeovers in the
first place. Ultimately I conclude that the causes of takeovers are too uncertain for SVT to be
definitely Barnesian, though the evidence I examine in this paper, combined with additional

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Davis, for instance, claims that the following assessment by a Ford executive is indicative of shareholder value theory, even
though it only mentions an increased focus on share prices: We believe the market value of the The Associates is neither fully nor
consistently reflected in Fords stock price (Davis 2009, 86)

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Defined by Davis as the systems that allocate power and control of resources among participants (boards of directors,
shareholders, executives) in organization
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primary source research, would be consistent with that interpretation.

Evolution of Shareholder Value Theory

The ideal of SVT is a world where managers of corporations act in the best interest of their
shareholders by increasing their wealth. This contemporary theory of the purpose of the firm is
a seen as trump[ing], subsum[ing], or even incorperat[ing] all other claims as increasing the
stock price complements all other goals of the corporation (Ho 2009, 212). This ideal, which
corporations have mostly realized today, can be contrasted with its ideological 1940s and 50s
predecessor welfare capitalism, where the ideal corporation attempted to benefit its workers
and community (in fact, these were often the same parties) by providing benefits like pensions,
health plans, educational systems, and recreational opportunities.
In practice, SVT also stands opposed to managerial capitalism (or manageralism),
where managers acted in their own interests at the expense of shareholders and the profits of
the company (though sometimes not at the expense of their communities, as they needed to
provide social services in order to maintain a strong public reputation). SVT advocates and
raiders (and raiders who were SVT advocates) saw manageralist acts as mostly negative,
characterized by excessive perquisites and rampant growth, where the executives logic was
that managing a larger business with more tiers of workers warranted additional
compensation. Because of anti-trust legislation, this growth was required to be between
companies of different industries: Beatrice Foods, for instance, was a 1960s conglomerate that
started as a dairy company but eventually acquired more than a hundred other companies,
specializing in businesses from car rentals to feminine care and suitcases. Though this
benefited executives in the short term, it was bad for the long-term health of firms because
there was no possibility of expertise or returns to scale, only bureaucracy as additional
managers were added to oversee the managers in each industry. This diversified conglomerate
structure built corporations so diffuse and redundant that the sums of their parts became
greater than their wholes, a crucial opportunity for the takeover artists of the 1980s. It is also
possible that managers, because they were not compensated according to profitability but
were at risk of losing their jobs if the firm failed, were incentivized to be overly conservative
with firm strategy during this period (Dobbin and Jung 2010, 45).
Excessive perquisites, unproductive growth, and a limiting of the downside without
attention to the upside were allowed to happen because of the fundamentally misaligned
incentives in a post-capitalist era where ownership had become abstracted from factual
control of property (Davis 2009, discussing Ralf Dahrendorfs terminology, 76; Zorn et al. 2005,
283-4). While originally corporations had been small enough for shareholders to sit on their
respective board(s) of directors, they eventually grew so large that shareholders were owners in
name only - since they could no longer credibility threaten to repossess a companys property if
the managers were not acting in their interest, they were left voiceless in management
decisions.
Scholars have argued that this central tension was resolved in part by the rise of
corporate takeovers in the 1980s, which allowed management to be fired or disciplined
according to agency theory (which aligned management and shareholder interests by paying
management in company stock or stock options - see the SVT as Effect section for more
discussion) and for diversified conglomerates to be broken up, downsized, and returned to a
single core-competence (Zorn et al. 2005, 283-4, CK Pralahad and Gary Hamel, The Core
Competencies of the Firm, as cited in Zorn et al. 2005, 271). In the next section I contextualize
the 1980s takeovers historically by briefly exploring what changes made them possible.
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Junk Bonds and the New Possibility of Leveraged Takeovers

Takeovers existed before the 1980s - they must have, as a central part of managerialism was
acquisitions of unrelated related firms but new during this period were junk bonds, which
allowed easier then ever access to capital, even to industry outsiders with few assets. In the
capital markets today there is a distinction between investment grade bonds issued by
reputable companies with low risks of defaulting and junk bonds issued by companies that are
rated below BBB or Baa by S&P and Moodys, respectively. These paid a higher interest rate to
buyers because of their additional risk. Before there was a liquid market for junk bonds (now
these are called high-yield bonds), only highly-rated companies could raise money for
acquisitions; and because their executives were from the manageralist school, they were
interested in integrating (merging) rather than raiding (taking over) the companies they
acquired.
Junk bonds started as a way for fallen angels former blue chip companies (those
that were nationally recognized and well-established and -financed) that had fallen on hard
times to raise funds and regain their status. Eventually Michael Milken of Drexel Burnham
Lambert also issued and promoted junk bonds rising stars, or young companies trying to get
off the ground, a decision that was influenced by W. Braddock Hickmans academic article
Bond Quality and Investor Experience (Sobel 2000, 65). Because market-oriented economies
(as opposed to commercial-bank-lending ones) are usually friendly to the prospect of high
futures based on ideas or employee talent (Davis 2009, 35, 94), the introduction of these rising
stars was popular with investors. Milken also insured liquidity by promising to buy the bonds
himself if the customer wanted to leave the market (Abolafia 96, 158). Eventually the Garn-St.
Germain Act of 1982 even allowed institutional investors like savings and loans associations,
which were facing inflation-induced pressure to generate higher returns, to buy high yield junk
bonds. Statistics illustrate the growth of the junk bond market: only a negligible amount of
bonds were issued in the 1970s, versus $839 million in 1981, $8.5 billion in 1985, and $12 billion
in 1987, when junk bonds accounted for 25% of the corporate bond market (Lewis 1989, 219).
From there, Milken either encouraged or merely facilitated (depending on whose
account you believe) the creation of the corporate raider class, where businessmen without
much capital of their own established shell companies from which to issue junk bonds, then
used the capital to take over underperforming or undervalued companies by becoming their
majority shareholders. Over time the takeover artists would use their cash flows to pay back
the debt on the junk bonds, which making other changes. In the case of an underperforming
company, the takeover artist would lay off current management and some workers, shut down
excess production, and do other things that appeared to increase efficiency, which would make
stock prices rise so they could resell their majority shares at a profit. For an undervalued
company where the sum of the different industrial businesses was greater than the whole, the
corporate raiders would first take the publically-traded corporation private, paying current
shareholders a mutually agreed upon premium substantially higher than market price, which
itself returns value to them (Ho 2009, 150), then sell off sections of the company.
Either of these scenarios would have been unthinkable in the 1960s, when it was
difficult for non-blue chip companies or non-managers to raise funds. From 1980 to 1990,
however, almost a full third of Fortune 500 companies received takeover bids (Davis,
Diekmann, and Tinsley 94 cited in Zorn 2005 272). In addition to a rise in the number of
takeovers, the takeovers of the 80s were markedly different in character: the possibility of
leverage (putting down only a limited amount of capital, then raising the rest in the capital
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markets) meant both that outsiders with decidedly non-managerial perspectives could still play
the takeover game, and that even huge firms could become targets; financialization created
less loyal investors with only arms length ties to the firms they bought stock in; the rise of
institutional investors shortened the average length of time a stock was held; and legislative
initiatives changed, moving away from concerns for competition and efficiency to the
competing rights and interests of shareholders, managers, employees, and other stakeholders
who are interested parties in the takeover process (Auerbach 1998, 1).
In the next section I will argue that the takeover wave either made institutional changes
that ensured firms and management would be more focused on providing value to
shareholders, or, by viscerally frightening firms similar to the one that had been taken over,
scared other industry managers into conforming to SVT.

SVT as Effect

In her recent ethnography of Wall Street, Karen Ho reports that her Wall Street informants cite
the takeover movement as crucial in aligning the interests of managers with those of
shareholders and putting an end to the ability of an elite, complacent, and self-serving
managerial class who squander corporate resources extravagantly on themselves or on ill-
advised expansions, and allow foreign competitors to overtake the United States in productive,
innovation, and strategy (Ho 2009, 130; verb tenses changed from past to present). Indeed,
some of the most material changes takeover artists made to acquired firms, like downsizing
(business process reengineering), de-diversifying by selling unrelated businesses
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(leaving
each firm with a singular core competency), and aligning the incentives of managers with that
of shareholders through payment in stocks or stock options
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(agency theory), acted with the
goal of raising share prices and ensured the perpetuation of SVT (Zorn et al. 2005, 283-4).
These changes became permanent: agency theory became recognized on Wall Street and firms
did not rediversify, perhaps in part because of other external disincentives like the existence of
securities analysts who would value the company at less if it was harder to understand from a
single industry perspective or institutional investors who saw it as their job alone to build
diversified portfolios of companies (Zorn 2005). This permanence reflected an
institutionalization of SVT through structural changes to companies.
Focus on share price increases were realized even in companies that werent taken
over, however: Event studies journals sprung up, targeting an increasing number of managers
hoping to signal to their investors that they were serious about shareholders, and they often
suggested that managers implement the changes raiders otherwise would have (Davis 2009,
51). Davis also notes that if [a companys] share price drops low enough, then outsiders will
find it worthwhile to buy control of the company and manage it more effectively - a sort of
Darwinian selection process favoring shareholder-oriented companies (Davis 2009, 33). Here
he does seem to conflate share-price orientation and shareholder-orientation, casting some
doubt on whether takeovers actually made managers focus more on shareholders, or if they
were merely continuing to focus on their own jobs, which they would lose if their firms were
taken over, using new strategies.
This counterhypothesis, that takeovers merely changed the environment and rules of

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the Regan administrations new neoliberal legislation allowed more vertical and horizontal mergers (where firms
bought their competitors or suppliers) as the taken-over company became dediversified, other companies became
more concentrated, which was supposedly efficient for the economy as a whole.
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an option constitutes the ability to buy stock at a fixed price at a certain date in the future executives will benefit
from a stock option if they work to make the share price increase during that period.
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the game for managerialism, is evidenced by the existence and prevalence of corporate
strategies for resisting takeover that have nothing to do with increasing shareholder value:
instituting staggered board of directors elections, for instance, where potential raiders must
wait multiple years to fill a board with their desired directors, or a voting rights plan, where
threat of a takeover can trigger a clause where 80% (a higher percentage than normal) of
current boards of directors must approve the takeover. Significant other strategies can have
positive impacts for shareholders: the most common defense, poison pills (also called
shareholder rights plans, a good example of pressure on corporations to rebrand their
practices to seem good for shareholders), allow current shareholders to buy new stock at a
discount in case of takeover threat. This dilutes control and makes it harder for raiders to get a
majority, but also increases the position of preexisting shareholders (Useem 1993, 48-51).
Nevertheless, we can conclude that takeovers either actually changed firms so that
they returned more value to shareholders, or that they induced similar firms to implement new
practices that were often, but not always, for the financially advantageous for shareholders.
But what was the motivation for takeovers in the first place?

The Possibility of SVT as Cause

Theorists provide several possible motivations for takeovers, one of which involves SVT itself -
this is closest to the Barnesian performativity argument. Another potential motivation is mere
profit-making for takeover artists (which I argue still takes the form of returning value to
shareholders and displays symptoms of SVT), and a third is that fixed income departments at
investment banks pushed takeovers as a way to generate additional fees. In this section I
explore each of these arguments and conclude that SVT, in name or practice, is a significant
cause of takeovers.
The first theory is that takeovers were explicitly engaged with SVT as a public-relations
oriented strategy for justifying otherwise unseemly behavior. Zorn et al. note that hostile
takeover firms argued forcefully that such break-ups were in the interest of investors, who
reaped higher share prices (Zorn et al. 2005, 271), and Ho points out that although the act of
liquidating a corporation to pay off private debt was viewed as destructive and even revolting
by critics dissent was often muted because raiders and bankers were able to link their
activities to the necessary pains of shareholder revolution (Ho 2009, 142) and that
corporations were dismantled in the name of shareholders (Ho 2009, 176). It is problematic
that neither Zorn et al. nor Ho provide first-hand accounts of takeover artists arguments,
raising the possibility that their identification of SVT as a justification for takeovers is a result of
the modern SVT-frame. Ho does, however, provide the logical argument that Wall Street firms
encouraged corporate raiders to market their ideas as shareholder-friendly to capture the favor
of securities analysts and institutional investors, who started the SVT revolution because they
were focused on improving proprietary trading and investment profits (Ho 2009, 140; Zorn et
al. 2009, 271). Additionally, the fact that the Jensen and Mecklings seminal paper on agency
theory, published in 1976, precedes the 80s takeover wave at least confirms the possibility that
takeover artists knew about SVT and its lack of enactment at the time.
It is impossible to tell whether takeover artists really believed in the moral entitlement
of shareholders to proportionate profits or the importance of SVT in constructing efficient
makers (analogous to the assumptions of the Black-Scholes model in the perfectly Barnesian
performative example). MacKenzies definition of the beginning stage of performativity, use
of an aspect of economics is somewhat ambiguous even if SVT was just a rhetorical tool
instead of an authentic worldview for takeover artists, its assumptions may have nevertheless
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been used, then eventually realized. In other words, used may describe both manipulation
of the theory (or practice in accordance with it) and also genuine ideological acceptance of its
normative merits. My inclination here is to say that there is not enough evidence for the latter,
which may be more fully Barnesian.
A second theory is that takeover artists only cared about their own profits. This isnt
mutually exclusive with takeover artists claiming SVT as a motivation, but even for authors who
deny the use of SVT rhetoric at all, it is important to note that takeover artists profits could
only be realized through dramatic share price increases, the main purpose of [a] takeover
according to Ho (Ho 2009, 137). Firms oriented towards raising share prices and firms run with
the goal of increasing the wealth of their shareholders are not automatically synonymous, but
in this case, takeover artists wanted to raise share prices because they themselves were the
shareholders in the acquired companies. Because they saw the goal of their companies as
increasing their own wealth through the mechanism of shareholding, they did exemplify the
practices of SVT by increasing their own wealth as shareholders as well the wealth of other
shareholders. In this case, they didnt actively use SVT, but certainly behaved in the acted as
the theory would have expected them to by focusing on share prices, the main visible sign of
those meaning to enact SVT. This makes a weaker case for the Barnesian performativity
metaphor overall but still locates elements of SVT on both the cause and effect side of
takeovers.
A last theory is that demand for junk bonds was so high that eventually the tail wagged
the dog, and fixed income departments at investment banks needed to generate more. This
theory claims that Michael Milken of Drexel Burnham Lambert talked business colleagues into
becoming corporate raiders and managed to make fees off of the takeover process at every
stage: Drexel would underwrite the junk bonds of their shell companies, its mergers and
acquisitions department would help them buy majority stakes in their target companies (and
meanwhile, other Wall Street firms would be hired to protect the targets), and eventually, the
formerly investment-grade blue-chip acquired company would drop below investment grade
and issue junk bonds of its own, again through Drexel (Lewis 1989, 220-22; OSullivan 2000,
cited by Ho 2009, 163). Even in these cases, however, investment bankers convinced others to
conduct takeovers by claiming that companies were undervalued in terms of their share prices,
and by alluding value gains that could be made by establishing core competency (core-
competence theory was intimately connected to shareholder value theory). Sometimes they
even referred to shareholders directly, for instance when George Roberts of private equity (the
sanitized name for a takeover firm) KKR claimed that the 1986 takeover of Safeway would
benefit the masses (Ho 2009, 144).

Conclusion

In this paper, I have considered the possibility that the relationship between SVT and takeovers
is Barnesian performative. On one hand, SVT is an effect of takeovers: takeover artists
restructure firms they acquire to better return value to shareholders (though business process
reengineering, executive compensation, and more) and they also scare the management of
similar firms into raising their share prices so they are more difficult to take over. On the other,
takeover artists may use the rhetoric and ideology of SVT to justify their actions to outsiders, or
investment banks may convince clients to conduct takeovers by highlighting opportunities the
they couldnt have identified without the SVT perspective on how to value a company. Some
grey area arises out of the difference between takeover artists and banks 1) deliberately acting
in the shareholders best interests, 2) explicitly using SVT to make arguments about
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takeovers, and 3) merely showing signs of the theory by increasing share prices, perhaps from
unrelated motivations. MacKenzie phrases it best when he says: One way of detecting
Barnesian performativity is by comparing market conditions and patterns of prices before and
after its widespread adoption If these conditions have changed toward greater conformity to
the theory or model, that is evidence consistent with Barnesian performativity. It does not
prove performativity, because the change could have taken place for reasons other than the
effects of the use of the theory or model (MacKenzie 2008, 21).
In his view, then, the fact that firms behaved in ways more closely aligned with the SVT
image of the world after the takeover wave is a necessary but not sufficient condition for
Barnesian performativity. Therefore, this paper does not rule out the possibility of Barnesian
performativity (as the evidence examined here is consistent with performance), but also
cannot definitively prove it because practices dont always signify underlying belief in theory
the change towards SHV brought on by takeovers could come from other sources besides
original belief in SHV.
I believe this question is important for future investigation because of the way
shareholder value capitalism has shaped the modern business environment, transforming it
into one where short-term price increases are valued over long-term financial health. This
same set of values, as well as a broader ethic wherein debt is viewed as productive and
destruction of companies and assets are seen as being in the best interest of the economy
(Poon and Wosniltzer 2012), may have culturally helped to drive the financial crisis of 2008.
Understanding the origins and mechanisms of establishment of this form of capitalism is a
crucial project for unwinding the conditions that allowed the crisis to occur. This case may also
be instructive in studying the way ideas (in this case, agency theory) diffuse from the academic
world and are enacted by corporations.
Future research on the relationship between SVT and takeovers on the SVT as cause
side could take the form of close readings of takeover artists press releases, examinations of
candid interviews with investment bankers, and attempts to determine how thoroughly
industry professionals had been exposed to the work of academic SVT theorists, perhaps
through business school classes or commissioned efficiency studies. On the SVT as effect side,
statistical analysis on the incidence of protections from takeovers that were not shareholder-
oriented (board of directors manipulation, for instance, wasnt; shareholder rights plans could
be) would be helpful. Going forward, it is also important to parse out magnitudes of the
impacts played by takeover artists, research analysts, and institutional investors in elevating
SHV to prominence Zorn et. al suggest they each play parts, though my inclination would be
to see analysts and investors as only encouraging firms to develop core competencies, not
necessarily driving changes related to agency theory or business process reengineering, which
the takeover artists certainly did.


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Works Cited

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