Stock markets are not what we think they are: the key roles of cross-ownership and corporate treasury stock

TL;DR

This paper reveals that corporations influence stock prices through cross-ownership, treasury stock management, and M&A activity, challenging the traditional view of market-driven price movements and highlighting their increasing direct control over markets.

Contribution

It introduces three mechanisms of corporate influence on stock prices, emphasizing the shift from indirect to direct market control by corporations over recent decades.

Findings

Corporations control stock prices via cross-ownership and control structures.

Treasury stock management significantly impacts stock price fluctuations.

M&A activity closely correlates with stock price levels.

Abstract

We describe and document three mechanisms by which corporations can influence or even control stock prices. (i) Parent and holding companies wield control over other publicly traded companies. (ii) Through clever management of treasury stock based on buyback programs and stock issuance, stock price fluctuations can be amplified or curbed. (iii) Finally, history shows a close interdependance between the level of stock prices on the one hand and merger and acquisition activity on the other hand. This perspective in which Boards of Directors of major companies shepherd the market offers a natural interpretation of the so-called "herd behavior" observed in stock markets. The traditional view holds that by driving profit expectations, corporations have an indirect role in shaping the market. In this paper, we suggest that over the last decades they became more and more the direct moving force of stock markets.