Economics 129 Ownership and Control
Inequality, ownership and economic growth
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Note we only have one class left so we will skip the last section on finance and go
directly to the papers on inequality to close the class.
Some major themes
Inequality can be a source of bad institutions (Rajan and Ramcharan)
Inequality can be a result of bad institutions and can mitigate the problem of failure of the
legal system (the rich earn rents because they provide ‘informal’ alternatives to formal
rules)
In the case of the corporation the key argument has several steps.
(1) industrialization requires ‘big’ firms and if everyone is going to share in the gains
from growth then its good to have many owners. Partnership not feasible
(2) so form corporations but they have unified control (through an elected board and
mangement).
(3) If there are going to be small investors then the separation of ownership and
control is inevitable
(4) But the separation of ownership and control creates problems of minority
oppression.
(5) So the only way to get dispersed ownership is to solve the problem of minority
oppression
(6) The U.S. is often the pointed to as the country were the separation of ownership
and control is greatest to day
(7) So where does this come from
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Berle and Means and many that have followed have assumed that the dispersed
stockholder corporation was an ‘invention’ of the later 19th century.
Two papers two periods , both challenge the received wisdom. But not the logic.
1) Hilt: Early when the legal framework business corporations is largely derived
from the ‘public purpose corporation”
Three types of corporations
Public utilities (bridges & turnpikes)
Financial institutions (Banks and insurance companies)
Manufacturing firms
A. Voting rights.
B. ownership concentration
Do voting rights affect ownership concentration
Do voting right affect voting concentration? Does it matter?
Are they related to stock market returns (issue of signaling)?
2) Bech and DeLong when the legal framework has matured and after the great
merger movement.
What is important to note, is that the legal regulatory framework that allows dispersed
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ownership arises after dispersed ownership has actually taken place. So apparent
contradiction.
So we go back to what the different players want
Firm Founders (and blockholders)
Small shareholders (minority owners)
Managers
Government
Does this help with the history
Here we return to J-P Morgan and the large firms he created.
There are the successor firms to the entrepreneurial ventures created by Rockefeller,
Carnergie, Guggenheims, Westinghouse, A. Bell.
They arise in one of two ways (and in some firms both at once)
Founders want to sell out, or mergers dilute initial control.
Problem with dilution of ownership is that it implies dilution of control:
Very few firms try to use dual class shares to enshrine control in the founder families.
So unlike many of the initial firms, they do not have a set of controlling block holders,
at first founder families maintain control
But it soon passes to managers. They are neither block holders nor small holders, but
exercise control because they control the agenda and de facto select the board of
directors. .
when does this happen?
Before 1890, between 1890 and WW (great merger movement), or between WWI and
WWII
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Why does this happen?
Taxes,
life cycle of firms and families,
size of the market,
political intervention against monopolies
Is Managerial control a good thing?
Strategic initiatives
Other things