Stock Market and Managerial Ownership Essay

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Journal of Applied Corporate Finance

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The Rise in Managerial Stock Ownership by Clifford G. Holderness,
Boston College,
Randall S. Kroszner,
University of Chicago, and
Dennis P. Sheehan,
Pennsylvania State University


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by Clifford G. Holderness,
Boston College,
Randall S. Kroszner,
University of Chicago, and
Dennis P. Sheenan,
Pennsylvania State University*

uch of the vast research on corporate control over the past 30 years as well as many of the policy recommendations that have found their way into the securities law over the past 60 years are premised on the separation of ownership from control in public corporations. Thorstein Veblen first raised this issue in 1923 when he wrote of “absentee ownership.”1 It was also the central concern of Adolf Berle and
Gardner Means in their hugely influential book The
Modern Corporation and Private Property written in
1932. They warned that the separation of ownership and control “destroys the very foundation on which the economic order of the past three centuries has rested” and asserted that the “[d]ispersion in the ownership of separate enterprises...has already proceeded far, it is rapidly increasing, and appears to be an inevitable development”2 of the modern corporate system. More recently, academics such as Michael
Jensen and Mark Roe have argued that a wide variety of tax incentives, antitrust policies, regulations, and political pressures, rather than anything inherent in capitalism, has led to the rise of what Roe calls
“strong managers and weak owners.”3
Although the premise of the separation of ownership from management plays such a central

role, little, if any, evidence has been presented to support the proposition that managerial ownership has declined over time. We recently conducted a study that uses the earliest data available on ownership (published by the Securities and Exchange
Commission in 1936) to investigate how the level of managerial ownership has changed since 1935. We compared a comprehensive cross-section of roughly
1,500 publicly traded U.S. firms in 1935 with a modern benchmark of more than 4,200 exchangelisted firms for 1995.
Contrary to the received wisdom, we found that managerial stock ownership is higher now than in
1935. The average percentage of common stock held by a firm’s officers and directors as a group rose from
13% in 1935 to 21% in 1995. Median holdings doubled from 7% to 14%. Although the very largest firms had similar ownership percentages in both periods, a firm-size-weighted average was also higher in 1995 than 1935. In terms of real 1995 dollars, insider holdings were on average four times higher in 1995, rising from $18 million to $73 million, and this increase occurred across all firm sizes.
We examined two possible causes of this increase in managerial ownership. First, we explored whether managerial ownership has increased

*This is a shorter and less technical version of our paper entitled “Were the
Good Old Days That Good? Changes in Managerial Stock Ownership Since the
Great Depression,” Journal of Finance 54, 1999, pp. 435-69. That paper won the
Brattle Prize for the best paper in corporate finance published in the Journal of
Finance in 1999.
1. Thorstein Veblen, Absentee Ownership and Business Enterprise in Recent
Times: The Case of America (New York: B.W. Huebsch, reprinted by Augustus M.
Kelly, 1964).

2. Adolf Berle, Jr. and Gardner Means, The Modern Corporation and Private
Property (New York: Macmillan, 1932).
3. See, for example, Michael Jensen, “Eclipse of the public corporation,”
Harvard Business Review 67, 1989, pp. 61-74; idem, “The modern industrial revolution, exit and the failure of internal control systems,” Journal of Finance 48,
1993, pp. 831-880; Mark Roe, Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (Princeton, NJ: Princeton University Press, 1994).