Stock markets are not what we think they are: the key roles of cross-ownership and corporate treasury stock

We describe, document and statistically test three mechanisms by which corporations can influence or even control stock prices: (i) Parent and holding companies wield control over other publicly traded companies. (ii) Through clever management of treasury stock based on buyback programs and stock issuance, stock price fluctuations can be amplified or curbed. The shock of September 11, 2001 is used to test this effect. (iii) Finally, historical evidence shows that there is a close interdependence between the level of stock prices on the one hand and merger and acquisition activity on the other hand: on average, a 10% increase in the number of mergers brings about a 3% increase in the overall level of stock prices. If one adds up buybacks, initial public offerings and takeover transactions, all of which depend upon strategic decisions taken by corporate management, they represent on average 7.2% of the trade on the New York Stock Exchange over the period 1987-2003 (as much as 12% in specific years such as 1988). This perspective, in which the Boards of Directors of major companies “shepherd” the market, offers a natural interpretation of the so-called “herd behavior” observed in stock markets. The traditional view holds that, by driving profit expectations, corporations have an indirect role in shaping the market. In this paper, we suggest that over the last decades they became more and more the direct moving force of stock markets.