Shareholder Pandering and the End of the Economy

I just read this interesting paper by Larry Mitchell that seems particularly on point these days.  As a former denizen of Wall Street (Morgan Stanley Public Finance & Chemical High Yield), I can report that just about everyone I worked with knew that the stock market created an irrational focus on the price of equity in the short term -- whining stockholders are the bane of every good business executive with a decent long-term business plan.  But most of us assumed that was the price corporate America had to pay for all the equity that stockholders pumped into the market.  They'd made their deal with the devil and, well, at least the devil paid pretty well.  Right?  Wrong. 

With extensive historical data, Mitchell demonstrates that shareholders are actually bringing increasingly little to the table -- in fact, they haven't brough much for a long, long time.  Here's a particularly nice graph from the paper: 

Modern industry runs on debt, not equity.  In fact, Mitchell argues, the decline of equity is one of major untold stories of the last century. If he's right -- and I'll believe him until someone shows me better data -- then this turns the standard model of modern markets on its head.  Shareholder empowerment not only has major downsides, it has little or no upside, and the irrationality of our focus on equity is a lot worse than most of us imagined.  The takeaway: shareholder empowerment actually hurts both business and the serious investor, all for the sake of short-term speculation.  (As this is one of the few really good fights in corporate law, I'll be very curious to see how Bebchuck and other defenders of shareholder empowerment respond to this new data.)