The separation of ownership and control in the large corporation causes owners’ motivations to differ from those of managers. 2 The debate on the importance of stock ownership led to argument in one school of thought that the distribution of ownership has important implications for corporate efficiency and strategic development, 3 while in another, argument was for the irrelevancy of the distribution of ownership. 4
Empirical examination of the issue led to conflicting results that were attributed to data problems when attempting to construct meaningful measures of the distribution of stock ownership 5 and performance. 6 Here, we suggest that the effects of ownership structure on performance are best examined in the context of structural differences between firms, and develop and test a model that describes the influence of ownership structure and diversification strategy on performance.
Morck, Schleifer, and Vishny 7 (hereafter MSV) estimated the cross-sectional relationship between stock ownership by the board of directors and corporate performance in 1980 for a sample of 249 Fortune 500 firms. Two measures of corporate performance were used: Tobin’s Q and the ratio of net cash flows to the replacement cost of capital stock. Unlike Demsetz and Lehn 8 (hereafter DL), MSV relax the assumption of a linear relation between performance and stock ownership, and instead propose a nonmonotonic relationship. They test for different average performance (i.e., regression-model intercept) for each of the