AT A 1989 SHAREHOLDERS' MEETING of the Long Island Lighting Co. (LILCO), some of the company's owners let management know how they felt about LILCO's pending deal to sell the troubled $5 billion Shoreham nuclear plant to New York State for $1. Speaker after speaker insisted that management do whatever was necessary to get the reactor on-line. After all, they argued, much of that $5 billion came from their stock purchases and from the dividends they had not received in five years. These people felt that since they owned the company, they should have some say in policy. From all indications in that meeting hall, LILCO's owners would never approve the pending deal with New York State.
Absent from this shareholders' meeting was the United Banks of Colorado which owned 7.5 million shares of LILCO common stock and could have outvoted everybody in the room a thousand times over. In fact, large institutional owners controlled just over 50% of LILCO's voting stock. When it came time to actually vote on Shoreham's sale to New York State (for $1), LILCO's "owners" overwhelmingly approved it. Many of the individuals attending this shareholders meeting were stunned. Most had no idea about the power of, much less the existence of, LILCO's institutional investors. They had bought LILCO stock in order to retire on its dividend payments, payments which had all but dried up (Eckstein 1990).
Institutional investment in corporations is not unusual. But, institutional investment patterns often defy conventional economic and organizational wisdom. This is especially true with investment patterns in troubled and bankrupt corporations. For example, even though LILCO was in horrendous financial health throughout the 80s, sometimes teetering on the edge of extinction, institutional investment in the utility steadily increased. Why would the most knowledgeable and skilled investors place tens of millions of dollars in a company that might not last through the week?
Although the United States Senate in the late 1970s took a keen interest in the growing power of institutional investors (United States 1976; United States 1980), it generated few if any policies despite its conclusion that institutional investors were very powerful and largely unaccountable. Since then, there has been scant public attention to institutional investment even though it has become even more prevalent. This study is intended to stimulate dialogue among academics, business leaders, and policy makers about the causes and ramifications of institutional investment patterns in troubled and bankrupt corporations.
Conventional Perspectives of Institutional Investment in Troubled and Bankrupt Companies
OPEN AN ECONOMICS OR FINANCE TEXTBOOK and you have about a 50-50 chance of finding even a sentence on institutional investment. Those which do mention it generally limit themselves to a line or two about how institutional investors, like all investors, are subject to immutable market laws. In a sense, investors are merely the tangible mechanisms which direct capital into needed sectors. According to this neoclassical view, successful investors clearly interpret market signals while unsuccessful investors misinterpret these signals. Here, the flow of capital in a society is basically subservient to invisible market forces. Most importantly, the neoclassical view does not seem to make any qualitative distinctions between institutional and individual investment. Institutional investors direct more capital, and they do it more quickly than individual investors. From this perspective, bankruptcy is an automatic mechanism which weeds out troubled firms in order to maintain macroeconomic balance. Infallible market forces insure the survival of the economically fittest. Bankruptcy removes weak and unwanted substances from the economic system, much like white corpuscles remove unwanted substances from the human body. …