Knowledge that Transforms

By virtue of their ownership position, majority owner-managers appear to be less constrained than managers of firms with more diffuse ownership structures. Despite this, there is no evidence that majority-owned firms perform poorly and there is evidence that majority ownership is surviving as an organizational form. This implies that either these firms substitute other organizational constraints on managerial behavior or that majority control is efficient for some firms. Our analysis uncovers no evidence that majority owner-managers are constrained by other organizational mechanisms. We find that the choice of majority ownership is related to owner-specific rather than firm-specific characteristics. Approximately 80% of the sample majority-owned firms are either characterized by family involvement or are managed by the founder of the firm. Once this family/founder involvement in managing the firm diminishes, the firm is significantly less likely to be majority-controlled.

Managers typically increase their voting power following the creation of two classes of common stock and the adoption of an employee stock ownership plan. These changes can worsen managers' incentives and lead to a decline in performance. Alternatively, two classes of stock and ESOPs can allow managers to adopt value-maximizing policies that would not be possible in the face of takeover pressure. We find that these events are followed by below normal operating income. However, we find no reliable evidence that the increase in managers' voting power and the resulting divergence between managers' voting power and ownership of equity claims is related to subsequent operating performance.

Sellers who extend trade credit to their business customers choose whether to integrate the management of trade credit or to enter into specialized factoring contracts. Using original data from a broad cross-section of firms we test a model of this decision. The model is based on a theory of the firm that stresses transactions costs (including information costs) as determinants of vertical integration. Consistent with expectations, we find that specificity of assets to the buyer-seller relationship is negatively related to the decision to factor and that factors are more likely to be used when information and monitoring costs are high.