By Uwe Reinhardt
It is always to be welcomed when students give written or spoken expression to their moral sentiments on issues outside the University’s comfortable cocoon and debate these sentiments in a manner that befits a great university.
At the same time, it is less heartening when these expressions lead to facile and morally empty policy recommendations for the operation of the University at large.
From the viewpoint of an economist, for example, having the University’s investment arm, PRINCO, rid itself of the stock certificates on a set of companies whose role in Israel and the West Bank is deplored by the advocates of disinvestment strikes me as such an empty gesture.
One certainly can debate this issue from a strictly partisan basis, favoring one side or the other, as different factions on this campus have amply done.
One can also debate whether it is reasonable to force upon the University community a general policy on which that community is as sharply divided as it is on this issue. The trustees of Stanford, for example, just decided to vote against disinvestment on this ground.
Finally, one may forever debate the proper boundary for disinvestment in general. American corporations can become candidates for disinvestment for any number of reasons on which there are strong feelings by one group or another on this campus. Should PRINCO divest from any company that does business with countries that by our standards violate human rights — for example, say, those of women? Should PRINCO dump the stocks of the manufacturers of drones or guns?
In this commentary I will not address any of these contentious points on which we all have strong views, no doubt, and instead ask what goals disinvestment actually is meant to achieve and whether it actually can achieve them.
The proponents of disinvestment seem to theorize that disinvestment would throw sand into the operation of the target companies and thus dissuade them from activities of which the protesters disapprove. Does that actually make economic sense in a fluid global capital market?
Most, if not all, of the target companies’ shares of stock held in PRINCO’s portfolio were purchased by PRINCO in the market for stocks that had already been issued by the company years ago. One might call it the “pre-owned” or “second-hand” market for stocks. Does anyone sincerely believe that if a handful of American and European universities divested themselves of stock in a company, it would seriously hurt that company’s ability to raise equity capital from other investors in a global stock market, especially now, as global capital markets are awash in capital scouring the world for profitable investment opportunities?
True, if all universities inclined to disinvest were to do so in concert at one time, there might be a very short-run downward blip in the market price of the target company’s stock. But alert investors around the world — in the United States, in Europe, in Asia and in the Middle East — forever on the lookout for arbitrage opportunities would see in that downward blip a buying opportunity and instantly take advantage of it.
The CFOs of the target companies might report to their boards of directors that a temporary blip in the company’s stock price had occurred and why it had occurred, but they would also quickly assure the board that soon the market price of the stock will trend up again toward the intrinsic value of the stock. The latter depends strictly on the cash inflow expected by investors from the stock and the discount rate at which future investors translate expected future cash flows into present values, which then become their bid prices for the stock. Fluctuations of stock prices about their intrinsic values are taken with equanimity in the real world.
Given this likely scenario, what would disinvestment actually achieve?
The only way the market price of the company’s stock could be directly impacted for any length of time would be to target the firm’s income statement in a way that would depress earnings per share for some time and perhaps permanently. The disinvestment being proposed now does not do that. Therefore, I judge it to be an empty gesture.
I also judge it a facile gesture. Moral statements have more force, more personal sacrifice behind them, thanks to their advocates. What sacrifice do the advocates of disinvestment actually personally bear for that advocacy? I am hard put to think of any. Even if the policy were to impose a permanent loss on PRINCO, that is, on the University at large, who actually would bear these economic consequences?
Universities quite often serve as the wellspring for empty moral gestures.
During the Vietnam War, for example, our students struck the academic process in a protest over that war. To give their moral outrage visible expression, they refused en masse to sit for final examinations.
In principle, the refusal to sit for exams should have entailed that seniors would fail to graduate that year and that juniors would be forced to take an extra course the following year. That personal sacrifice might have caught the attention of the media. As it turned out, predictably, the Registrar’s Office, presumably with the blessing of Nassau Hall, fixed it somehow so that everyone got credit for his or her spring courses anyhow and every senior graduated on time.
But, presumably, a moral statement had been made in academia.
I invite the current proponents of disinvestment to explain in these pages where I err in my theory, if I do, and why their proposed policy is neither facile nor an empty gesture.
Uwe Reinhardt is a professor of economics and public affairs at the University. He can be reached firstname.lastname@example.org.