The Disciplinary Effect of Concentrated Ownership on Corporate Managerial Efficiency

Abstract

I examine the impact of ownership concentration on corporate managerial efficiency using panel data on 644 large publicly held companies in the United States between 1996 and 2001. I observe a meaningfully positive disciplinary effect of concentrated ownership on managerial efficiency, as measured by the firm’s selling, general, and administrative margin, and furthermore confirm the assumed direction of causality using two-stage least squares regressions. I also find that the disciplinary effect of concentrated ownership diminishes as the level of ownership concentration increases and that the effect is subdued if the primary source of concentration is insider ownership, as opposed to outsider ownership. My results confirm the Berle-Means thesis that the dispersal of corporate ownership in the publicly held corporation leads to a devolvement of corporate control wherein executives exploit the corporation as a tool for maximizing their private utilities against the best interests of shareholders.