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Think markets raise capital? Think again.

March 25, 2013 | G&M | John Kay as told to Brian Milner

On the glut of information available to investors:

“We need to dispose of the idea that more information is better and eliminate information that is at best noise that is irrelevant to the performance of the company and at worst information that actually distorts the performance.”
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Most startling, perhaps, was his finding that British companies obtain almost none of their capital from the stock market. As a source of funds for British business, “equity markets don’t even register on the radar screen,” Prof. Kay told an audience of about 100 lawyers attending the business law lecture co-sponsored by Davies and York University's Hennick Centre for Business and Law at a breakfast meeting in Toronto Friday. “They’re of no material significance at all.”

Entrepreneurs have little interest in going public. And in cases where they do come to market, it’s to provide liquidity for existing investors. “In a paradoxical way, the function of equity markets today is not to enable savers to put money into companies. It’s to enable them to get it out.”
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His study started from the position that “markets are for users [companies and investors], not for the people who work in them.” What he found, though, was just the opposite. While business gets by without any appreciable financial help from the equity emporium, and investors have essentially made nothing for the past decade, a growing string of financial middlemen have cleaned up. He rhymes off a long list that includes registrars, custodians, nominees, asset managers, pension fund trustees, investment consultants, independent advisers and on and on – many with incentives that favour lots of trading.

Fund managers have told him they would like to do things differently, but can’t. “There’s no more powerful indicator of a dysfunctional system than that.”

The big asset management firms are the most important link in the equities chain, but the others all line up at the trough, too. “The overall investment chain is now extremely long and extremely costly.”