Sustainability at the Schumpeterian Margin?
Energy, Environmental and Mineral Economist
gprasadrao@hotmail.com; gprao64.blogspot.com
Disclaimer:
This blog couldn’t be so important as to cause a Earthquake 10 to the global IPO markets? Thankfully not, but I must take Insurance nonetheless. The model presented here, as with any conception or design, is but one of a myriad alternatives. The author makes no claim of the factuality of the contents, the accuracy of the design, or the purported outcomes from implementing it. As for mis-representations, omissions, unintended errors, and intended obfuscations, …… Beware !
For a PDF of the entire Manuscript, Click here
The nature of Private enterprise is such that it must maximize returns for the Capital invested and the Labor employed toward producing a good or service that the society seeks. That Private return is maximized, on one hand, for the conservation of both effort and capital, and on the other, for exploitation of the Commons & Public resources, due which reason, the entrepreneur so plans, designs and strategizes that he obtains all the gain privately, while forcing production, transport, marketing (and post-consumption) externalities upon the Environment and the Public. This phenomenon, when it extends across space, time, nations and sectors of the Nominal, obtains an economy characterized by unsustainably high private returns that are buttressed by externalities perpetrated upon the Commons, or suffered inter-temporally, if impercetibly by the Public. However, in a nominally-captured, per-capita society in which people have a significant willingness to pay to secure and retain employment, or process various personal lifestage lumpsums, such externalities are deemed ‘necessary evil’ to grow the nation’s economy, retain competitiveness within a global nominal paradigm, even secure a pareto with the Real society. Further, the Sustainability of the Dividend Yield Sector, that enlarges behind the Frontier economy within a per-capita economy, is paramount in the context of the persistent trend to move away from publicly-shared solutions to private, per-capita services. This trend is even more worrisome in the context of the realization that the Dividend Yield-assimilated per-capita society generates more profits and employment when the supply and use of its products and services are less than maximally efficient - an outcome that is socially and economically conducive, and a matter of Political and environmental salience. Since all societies, and all political governments, seek an expansion of Nominal economic growth to support Citizen services, sustain the poor, grow jobs, augment lifestyle quality, retain political support, and increment investor returns, it is clear that such mal-incentives that pervade the Dividend-yield sector of the economy, would exacerbate production- and consumption-associated SESH and SDRE externalities, and turn the global society more susceptible to a spectrum of risks in an already polarized society. It is, then, an imperative and a challenge to Externality Economists to anticipate this global phenomenon with appropriate policies. The realm of Real-Nominal Finance offers an opportunity to implement such anticipatory policy.
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One Small Step ... and a Global Moon to Land!
The global Nominal paradigm comprises ever-churning pots of Capitals from different constituencies and sectors. These Capital span the Frontier OpCy Technology economy, the OpCy Social-MDG economy, the mainstream CC Growth economy, the (egalitarian) Resource-Capital the polar-hedged SDRE-Infrastructure economy, and indeed an ever-enlarging Dividend Yield economy. Whereas the OpCy economy, on one hand, expands the sphere of economic activity by leveraging technological advances in IPO launches, and leverages/exploits social resolutions through the Political government on the other, and whereas the CC economy banks those gains by expanding the reach of Resource-Capital-leveraged luxury products to the benefit of the society, the polar-hedged SDRE Infrastructure economy obtains strategic improvements in environmental and social infrastructure, while the Dividend Yield sector represents the culmination of efficiency gains reflecting in commoditization of its products offered (sustainably) as essentials to the Public. Together, these Capital expand the Nominal economy in the pursuit of a private profit maximization. However, the pursuit of those Private objectives within an per-capita nominal paradigm imply an enlargement of social and environmental externalities as well. If IPO Capital represents the leading edge of the economy, Mergers and Buybacks that occur toward entry in to the Dividend Yield paradigm represent the trailing edge of the schumpeterian recycling of Capital essential to rejuvenate the economy. And though SESH and MDG initiatives resolve externalities to the extent socially necessary to administer the Nominal economy, it is necessary, in the context of Political populism, the slow, but inexorable population growth, and the globally-networked, trade-intensive Nominal economy, that the Dividend Yield sector be not only efficient, but also be environmentally sustainable so its operations do not cause or enlarge SESH and SDRE externalities.
If a sustainable and efficient Dividend Yield economy is sacrosanct to an enlarging per-capita economy, one cannot under-estimate the strategic importance of correctly pricing externality-intensive, one-time events such as IPOs within a monetary-hastening, globally-competitive Nominal paradigm. One-time events in the Nominal are crucial because they hasten expectational, even speculative monetary flows from the long future that later the path of socio-economic development, and hence set an irreversible course in to the future. The truth however, is stark, and often, disconcerting. By serving as a fresh and repeating opportunity for concentrated private gains, IPOs attract significant entrepreneurial and institutional interest toward enlarging it at the expense of externalities on the Public, that are then exploited, if not abetted by Investors switching their Capital from other sections of the market. IPOs of firms constituted of Open-Cycle or Nominal-ZS Capital cause a plethora of pecuniary and non-pecuniary externalities upon the Nominal and Real society, at home and beyond, and extend further in to unrealized, uncompensated damages upon Passurance lands, and the environmental Commons. Paradoxically, IPOs also represent the final opportunity for the Public to intervene and exact a price for the externalities that the firm would impose upon them post a successful launch with a market-sanctioned and Bullion-hedged PE Multiple and growth path. It is for these reasons that a sustainable and correct pricing of IPOs is paramount to the sustainable functioning of Equity markets in a pareto with Nature and the Real Society.
This blog has outlined the structure of the IPO market with particular attention to the Capital structure and socio-economic, financial and market-niche options available to the firm, and how such firms interact with other firms exiting the CC Growth in to the Dividend Yield section of the market, to bring about a schumpeterian recycling of Capital. It has offered a model of how the BookRunner puts together a diversely-represented Syndicate and how it regulates the IPO in to optimizing its future given its nature of Capital. The design explains how the IPO Long-run Floor Price is determined. In particular, it highlights the two-faced role of an International Sustainability Organization in fine-tuning the Price and PE of IPOs consistent with its Sustainability diligences. It explains how existing OpCy firms could challenge IPOs to win their Sundowns and Buybacks, and how a successful IPO could force the merger and exit of a ‘Challenger Twin OE’ into Dividend Yield. The design not only reveals a particularly insiduous market-facilitated (pecuniary) externality, but suggests an FV-Finance-based corrective/deterrent in the form of an ‘Incentive-ZS-Disincentive’ to prospective IPOs that force a PE-Upgrade/enforce a PE Downgrade to induce IPOs to re-orient their Business plans toward Sustainability. The two-stage disincentive against the unsustainable business plans of OpCy IPOs – a lower PE Multiple at the IPO, and thereafter a sustainability-calibrated, variable hiatus before those Bond-liened IPO funds are returned the Entrepreneur, transform a much sought-after ‘Double Dividend’ in to a ‘double divide’ that instead induce IPOs to switch tracks toward Sustainability. Proposed Exit Loads post an IPO, and post entry in to Dividend Yield, correct aggrandizing incentives facing large investors, and ensure stability in the schumpeterian cycling of Capital (and Technologies). The suggested strategy not only enforces Sustainability incentives facing IPOs and regulates schumpeterian recycling of Capital, but also streamlines firms entering the Dividend Yield paradigm to conform with Sustainability. Such two-part incentivization prioritizes Sustainability at, both, the leading and lagging frontiers of the Nominal economy, and obtains an expedited reversal of the unsustainable, Profit-seeking and PV-insistent market toward Sustainability. The design also offers an example of how a prospective firm may pro-actively subscribe to a multi-pronged Sustainability agenda to improve its prospects at the IPO, and/or expressly restructure the nature of its Capital to achieve Sustainability in operations. Unlisted firms, particularly small businesses that qualify as Dividend Yield firms, but have not the size or diligences to enter the Capital market, are ingeniously accommodated in the proposed design through a pareto-mechanism. The mechanism permits existing listed Dividend Yield firms to accept and nurture unlisted small businesses toward listing, in return for a mirror capital share in a future IPO. This incentive brings about a broad-based participation of business across various business tiers, and thus fast-forwards the Sustainability concept.
The proposal made here differs from other studies in modeling the discounting of future profits as a function of endogenous Private, and exogenous Public variables. It elucidates upon the design and structuring of Firm Capital that guide its operations for all times in the economy. It indicates how the implicit rate of discounting future earnings could be analytically modeled with endogenous and exogenous variables toward a larger optimization of IPO prospects. The optimization facilitates the elicitation of a closed-form analytical expression that obtains the optimal IPO launch price given the various macro-economic, Private and Public factors contextual to the IPO. The strategy permits academics to further obtain the optimum level of IPO participation in Sustainability initiatives given the impact of temporally-varying costs and benefits on Profits, Revenue Visibility, Discount rate and indeed, the PE Multiple. When (and if) generalized to the economy, the design suggested here would obtain a ‘Frontier IPO - LaggingDivYld’ sector that is simultaneously, privately efficient, financial equitable, publicly SESH equitable and SDRE globally-responsible.
Every Cloud has a silver lining, every Beauty a blemish…. And any Proposal a detractor! Proposals, even of the Social Pareto FV kind, are not immune to design errors, unanticipated complexities due the scope and breadth of the design, random influences, or illegal conspiracies and frauds. Firms operate in several different sectors with different kinds of Capital, and the same complicates any attempt toward holistic modeling. The fact that the domain of this proposal extends across all equity markets around the world, and encapsulates the largest fraction of traded Equity Capital, only makes matters worse. The design proposed here requires the cooperation of global multi-lateral institutions, the political Government, and the financial apparatus in every participating nation. It is difficult, in the context of the multitude of financial laws, rules and regulation across nations of the world, to put together an overarching design that anticipates that diversity. Further, the Political Nominal Compact could, in a subverted democracy, serve the ends of (RoW OpCy) Businesses and further exacerbate externalities. Consequently, there are likely to be significant issues, if not impediments to the adoption of this design. Nonetheless, the the primacy of the Global Sustainability Cause that the design espouses could only recommend this Proposal to Governments, Capital Markets, Industry Associations and Academics toward review and implementation.
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