Re: dilution and risk

["Charles W. Upton" <cupton@kent.edu>]

At 06:13 PM 10/21/99 +1000, you wrote:
>Dear Ownership Group
>
>Point 1 of Charles Upton's posting diverts the debate from a valuable
>feature of ESOP's and a process of self-financing economic development.  
>
>Point 1 assumes that it is the employees who have to accept the risk of
>financing business expansion.  Many ESOPs are designed so employees need
>neither utilise their own funds to obtain an equity interest or become
>exposed to the liabilities incurred to finance the issue of new shares to
>the ESOP trust used to finance expansion of the business on their behalf.
>In such situations the employee is in a no lose situation to make
>irrelevant the statement of Charles Upton that "Optimal portfolio theory
>requires diversification".

The only way that employees could always be in a no-lose situation would be
if they never acquired any equity interest in the business.  One they do,
they have something to lose.  Is Turnbull sugessting that employees never
acquire any equity interest in the business.  I think not.  Once I have
equity capital, then there is something to lose.  

Perhaps Turnbull means that employees acquire their interest without
putting up any up front cash.  But someone is putting up the cash, and that
cash has an opportunity cost. 

As to diverting the debate, I didnt know I was doing more than pointing out
a fact.  The underdiversification issue is an issue in any owner-owned or
employee-owned business, 


Charles W. Upton
2324 Exline Circle
Hudson OH 44236

Department of Economics
Kent State University
http://www.personal.kent.edu/~cupton