Control Type and the Market for Corporate Control in Large U.S. Corporations

TLDR: In this article, the authors investigated the effect of the separation of ownership from control on corporate behavior and found that the profits of management-controlled firms are more variable than those of own-controlled ones.

Abstract: IN recent years various attempts have been made to investigate the effect which the separation of ownership from control has on corporate behaviour. Studies by Elliott [4], Holl [8], Kamerschen [9] and Larner [i i] have concluded that this separation has little or no effect on the performance of the firm while studies by Monsen et al. [I 5], Boudreaux [i] and Radice [i 9] suggest that this separation allows owner-controlled firms to report higher and more variable profits than management-controlled firms. In addition to these, Palmer [i 6], [I 7], [i8] has obtained results suggesting that the profits of management-controlled firms are more variable than those of ownercontrolled firms and that only in monopolistic industries are the latter able to report higher profits than the former. This problem is investigated further in the present paper by bringing into the analysis the market for corporate control. This market is concerned with the buying and selling of voting stock and their effects on company control. If the market for corporate control operates efficiently all companies will be constrained to maximize profits and there will be an identity of interests among managers and owners; if not, the separation of ownership from control will have behavioural implications for those management-controlled firms that are able to evade, or are unaffected by, market discipline. It then becomes possible for the management of each of these firms to divert funds away from the owners in the sense that profits are lower than they would be