Traditionally, institutional investors have used carrots and sticks to ensure that the stocks in their portfolio keep going up. Probably the most prominent carrot for managers is the stock option, which has grown in popularity. In the 1960s and '70s, shareholders had to contend with a bear market as the 20-year period ending in 1982 showed an average zero real return on the stock market. The sluggish performance was blamed on the managers who were paid regardless of the company s performance. In what is often described as a shareholder revolution, institutional investors decided that to overcome the bear market they had to ensure that managers had an interest in seeing the company s stock price rise.
Managers now have a vested interest in raising the stock price of the company.
Aside from such strategies to increase profits as outsourcing, downsizing, or moving production overseas, managers can spend corporate resources to ensure rising stock prices. One technique is stock repurchase plans whereby management is authorized to buy back the company s own shares. Nowadays, firms are buying back shares faster than they are issuing them. Net new equity issues have been negative since the first quarter of 1994. Corporations are also dedicating a growing proportion of their profits to dividend payments.