Tuesday, April 16, 2013
Minding Your Alphas and Betas
Martin Khor has an interesting post over at Triple Crisis that speculates on the secret negotiations over a draft Trans-Pacific Partnership Agreement. He sees grounds for worry that a chapter on state-owned enterprises (SOE’s) will include a requirement that they pursue a commercial rate of return, based on existing Australian guidelines.
The trade lawyers would do well to absorb a bit of economic theory. Private firms whose sole objective is profit maximization—firms that adhere to the “shareholder” model—will of course do just that, at least if they can avoid being commandeered by insiders. But there is another model out there, the “stakeholder” model, in which firms are expected to serve a variety of interests, including not only investors but also workers, consumers, suppliers and affected communities. SOE’s are nearly everywhere run on something like a stakeholder model.
To do its good deeds, a stakeholder firm has to stay in business. Logically, its maximand should be the likelihood of being profitable over some time horizon. That’s different from the shareholder maximand of profitability itself. Given a risk-return tradeoff, SOE’s should generate lower average profit rates than firms run for the benefit of shareholders. Lower beta, lower alpha.
Or it could be that the negotiators want to use the TPPA as a weapon against the stakeholder approach altogether in favor of a world of frictionless investment opportunities, in which case their ignorance is strategic.