During a bull stock market, accounting rules favor firms that engage in aggressive mergers. In the 1990s, this process helped reorganize the industries of media, telecommunications, and the Internet. In the aftermath and slow deflation of equity prices since 2000, some firms have not met their expectations of higher returns and have begun shedding the goodwill that inflated their asset accounts during the 1990s. WorldCom's write-down of its entire stock of goodwill, $45 billion, is only one example of this phenomenon. Applying Thorstein Veblen's theory of corporate finance to the current era of mergers and recent evolution of accounting standards provides insight into the accounting mechanisms that allow for the expansion, reorganization, and ultimate consolidation of ownership structures.
Despite its original formulation to explain the circumstances of the late nineteenth century, Veblen's theory of corporate finance can still be usefully applied to the American economy of the late twentieth century. While the corporation of the late twentieth century is in many respects a much advanced legal creature, Veblen's analysis retains its usefulness because it explores the fundamental features of the corporation and corporate finance--qualitative features that have not changed during its evolution by degree. His theory of capital explains the positive relationship between stock market prices and the value of balance sheet assets that allows the expansion and contraction of corporate assets over the business cycle. In this paper, Veblen's theory of corporate finance will be developed and used to explain the inflation and deflation of goodwill and stock prices associated with the late 1990s business cycle expansion and following contraction. Specific attention will be given to the recent evolution of accounting standards and the impact those changes have had on the asset expansion/contraction of the 1990s and early twenty-first century.
The Theory of Capital
According to Veblen, capital in its modern form is a pecuniary fund whose present value is determined by an expectation of future profitability. Any asset that provides a claim to a flow of future earnings--whether as tangible as a drill press or as ephemeral as the time spent viewing a Web site--can be used as the basis for a new issue of corporate stock. As such, it is included on the firm's balance sheet as an asset. This theory of capital, which includes serviceable assets and sabotage as generators of profit, provides a distinctly different perspective from the assumption that a capital stock is simply a fund of productive equipment. An increase in profitability, and an expansion of capital values, can come from a manipulation or withholding of productive capacity as easily as from its employment (Veblen  1988, 135-136; Raines and Leathers 1996, 137-139; Ranson 1983).
Because the value of the corporation's assets is based on expectations of future profitability, the price of corporate stock on the secondary exchange is subject to constant revaluation. New information about industry circumstance, changing preferences for risk or speculation, real or imagined alterations of the legal environment-all have an impact on stock price. Rather than a tool of arbitrage revealing a true underlying price, the stock market becomes a mirror of shifting public perception, the opinions of its participants influencing stock price as much as company policy. In this way, stock prices depend on the complex interactions of group psychology (Raines and Leathers 1996, 141).
The Stock Market Dynamic and Mergers
Taken together, modern capital and the group psychology of the stock market form a powerful tool for reorganizing the ownership of productive assets. This...