In unique research, Julian Franks looked at over 100 years of data on corporate ownership and found that relationships of trust have been a crucial historical ingredient in the ownership of firms. He argues that relationships of trust are as important now as ever.
One of the most well-known facts about corporate ownership is that the ownership of large listed companies is dispersed in the UK and US and concentrated in most other countries. In more than 50 per cent of European companies, a single voting block of shareholders commands a majority of shares. In contrast, in the UK and US, it is less than three per cent.
Two theories have been proposed to explain these differences. The first is that US legislators esponded to a populist agenda in the 1930s by limiting the power of large financial conglomerates. The second argues that concentrated ownership is a response to inadequate investor protection - in the absence of protection, investors sought to protect their investments through large share blocks. In both of these theories, dispersed ownership is associated with strong investor protection. The difference in ownership concentrations can be attributed to weak investor protection in Continental Europe and strong investor protection in the UK and US.
Differences in legal structures are deep-rooted and have a long history. One would expect differences in investor protection also to have a long history, particularly in the UK, where common law originated; but this is not the case. At the beginning of the 20th century, the UK was actually devoid of anti-director rights provisions and protection of small investors.
My research examined how the ownership of a particular group of firms evolved over a hundred years and the extent to which law contributed to that evolution. The research was made possible by the existence of an unusually rich source of data in the UK since, for more than a century, Parliament has required companies to provide information, including accounts and a register of shareholders, to a central depository open to the public. From this data, my research team and I selected three samples for special scrutiny - one from companies incorporated around 1900 that have been in existence since then, a second from firms incorporated at the same time that are no longer in existence, and a third from companies incorporated around 1960 that are still in existence.
We found that ownership of the sample of firms incorporated around 1900 was rapidly dispersed, with the shareholdings of inside directors more than halving over the 40 years to 1940. Interestingly, when investor protection was finally strengthened in the second half of the century, it had little effect on either levels or rates of ownership dispersion. Ownership of well-established companies was already dispersed; and rates of dispersion of newly incorporated firms, for example of the sample of firms incorporated around 1960, were similar to those of firms incorporated at the start of the century.
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