Were the Good Old Days that Good?: Evolution of Corporate Ownership and Governance Since the Great Depression
Clifford G. Holderness
Boston College - Department of Finance
Randall S. Kroszner
Booth School of Business, University of Chicago; National Bureau of Economic Research (NBER)
Dennis P. Sheehan
Pennsylvania State University
This paper studies how ownership and governance of publicly-traded corporations have evolved since the Great Depression. Despite the widespread view from Berle and Means (1932) onward that ownership of firms is increasingly separated from managerial control of those firms, almost no time-series research exists to investigate this question. A previously neglected 1935 ownership survey of all exchange-traded firms undertaken by the Securities and Exchange Commission provides the earliest available source on ownership for a large cross-section of U.S. firms. We collect other firm-level data from the Moody's Manuals to create a comprehensive data base of roughly 1,600 publicly-traded firms from 60 years ago. For the 1990s, we create a modern comparison sample of approximately 5,000 exchange-listed firms using CD-ROM data bases. Contrary to Berle and Means (1932), we find that managerial ownership of publicly-traded firms has increased, not decreased, during the century. The average percentage of shares held by a firm's officers and directors has risen from 13 percent to 22 percent between 1935 and 1995. We then investigate possible explanations for the increase in managerial ownership. In doing so, we also will be illustrating how access to the public capital markets has evolved as the markets and regulations have changed. Among the alternative explanations we examine are changes in: the selection, age, and industry mix of publicly-traded firms, the use of alternative mechanisms to align the incentives of managers with owners, the relationship between ownership and performance, and the determinants of "optimal" ownership structure. Age and industry composition do not seem to account for the changes, and the ownership-performance relationship appears to be stable over time. Our preliminary results suggest that the high volatility of the financial markets earlier in the century may be an important factor contributing to lower "optimal" managerial ownership (due to either risk-aversion or greater difficulty of diversification) then than now. In addition to addressing basic issues in the theory of the firm, the results of this study highlight the importance of understanding how capital markets and corporate governance systems develop and interact in order to inform debates concerning the financial reform in both developed and emerging market economies.
JEL Classification: G32, G38, K22
Date posted: May 10, 1998
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