Knowledge that Transforms

We examine the relationship between ownership structure and corporate crime. Our approach draws upon two lines of research: (1) the theory of the firm which poses ownership as a critical incentive mechanism and (2) the economic theory of corporate crime, which emphasizes the role played by top management in affecting crime in the corporation. We find that crime occurs less frequently among firms in which management has a larger ownership stake. Our results imply that penalizing `corporations' (shareholders) deters crime, and that corporate crime tends not to benefit shareholders, ex ante. Rather than being something shareholders have encouraged, corporate crime appears to reflect an agency cost limited but not optimally eliminated through the costly efforts of top management. The evidence is consistent with the notion that ownership structure plays an important role in aligning the hidden actions of top management with the shareholder interest.

We study whether boards of directors concentrate on performance near compensation decision times rather than providing consistent incentives for chief executive officers (CEO) throughout the fiscal year. We show empirically that managers can profit by moving sales revenue among fiscal quarters. Though this may suggest that boards use short-term trends when determining rewards, we find evidence consistent with boards tying pay to recent sales growth so as to use the best information about future performance. We also find that the timing of profits throughout the year does not affect CEO pay, which may suggest that smoothing firm income is important to CEOs.

The ownership structures of firms are endogenous. This makes it difficult to produce direct evidence on the Berle and Means [Berle, A.A., Means, G.C., 1932. The Modern Corporation and Private Property, New York.] hypothesis that corporate governance becomes less efficient as the degree of separation of ownership and control increases. We address this issue by studying Austrian cooperative banking, an organizational form in which the ownership structure is exogenous. We show that firm performance declines as the number of cooperative members increases, corresponding to a greater separation of ownership and control. We also provide direct evidence on another theory that is difficult to test, namely, the efficiency wage hypothesis. We show that the decline in firm performance as the number of shareholders increases is due to an increase in efficiency wages.