Stock exchanges have become volatile in recent years. Investors who used to invest long term now have shifted to a short term investment horizon due to the changed nature of the stock exchanges. Company CEO’s get rewarded in form of stock options if they can keep company share price above a certain level. Hedge funds have also contributed to this shift to the short term investing style. Hedge funds look for quick profits. Hedge funds are not interested in investing long term as they have to make high returns which is only possible if they can increase market volatility. These and a host of other factors have simply shifted the time horizon of the majority of people to short term. Short term investing is not good for innovation and long term growth as everyone is looking for a quick profits. But an entrepreneur from Silicon Valley has submitted a plan for approval to SEC that envisages establishing a new stock exchange that has rules that favor long term investors.
Now getting this plan approved by SEC can be a multi year long process. Even after approval, it will be hard work to get companies listed on the new stock exchange. Eric Ries, a San Francisco entrepreneur and author of The Lean Startup, said his team working on the Long-Term Stock Exchange (LTSE) intends to apply to the US Securities and Exchange Commission (SEC) for approval to operate a new exchange, though declined to specify the timing.
In the last few years, the number of IPOs that have been offered in US Stock Exchanges have declined dramatically as new startup companies are choosing either to delay IPOs or simply choose not going public. The reason is simple most startups fear getting punished by the markers for ignoring the short term performance metrics like earnings per share etc. These short term metrics can be easily manipulated and have no incentive for long term growth and innovation.But critics argue that Ries LTSE can become a vehicle for rewarding mediocre managers by ignoring their short term performance metrics. “The threat of takeover has done far more to get good behavior out of corporations than perhaps anything else…I suspect a sophisticated investor may shun” an exchange that creates obstacles to investors who want to shake things up.
Google delayed it’s IPO for a number of years so did Facebook. Google’s 2004 attempt during its IPO to distribute its shares more equitably via a “Dutch” auction led to a disappointing first day of trading and never caught on. Marc Andreessen sees Google’s unorthodox IPO as “a great case study and a cautionary tale,” he said. “A big part of what Eric’s trying to do is make sure that obviously doesn’t happen.”
As said above it may take several years by SEC to give for approval for LTSE. After getting approved by SEC, Ries will be facing the biggest challenge: Getting new companies to list with LTSE. Did you read the last post on a new man claiming to be the creator of Bitcoin?