Evolution of Corporate Ownership

In our paper, The evolution of corporate ownership after IPO: The impact of investor protection, which was recently accepted for publication in the Review of Financial Studies, we examine the ownership structure for newly public firms, and how that structure changes over time. We assemble new panel data on corporate ownership covering a large panel of firms in 34 countries between 1995 and 2006, including 2,700 firms that go public during this period.

Despite recent research which documents that ownership concentration is higher in countries with weak investor protection, we find that newly public firms tend to have concentrated ownership regardless of the level of investor protection. Next, we examine how the ownership structure changes over time. We find that firms in countries with good investor protection become widely held faster, even though ownership is concentrated for a few years around the IPO. Both new share issues and blockholder sales are more common in countries where protection is strong and private benefits of control are small. Investor protection has a particularly pronounced effect on the diffusion of ownership for firms with attractive growth opportunities. Such firms appear to be more willing to issue new shares, thereby diluting ownership. We also find that firms in countries with weak legal protection of shareholders rely more heavily on debt as a source of capital when they face growth opportunities. However, firms’ ability to substitute away from equity to debt appears incomplete. Consistent with other research on finance and growth, we find that firms in countries with weaker investor protection increase investment by smaller amounts than firms in countries with stronger investor protection in response to growth opportunities.

We next consider the implications of these findings for financing choices and patterns in firm growth. In additional tests, we conclude that our findings are not driven by four alternative hypotheses concerning the diffusion of corporate ownership which would otherwise distort our findings. The first alternative hypothesis is that changes in corporate ownership reflect blockholders’ and managers’ explicit attempts to time the market. A second alternative is that measures of investor protection capture effects of stock market liquidity, that is, the ability of blockholders to find a buyer for their shares. Third, our estimates of the impact of investor protection on ownership diffusion might reflect differences in the types of firms that go public in different environments. Lastly, growth opportunities differed across countries during our sample period in a way that is correlated with investor protection.

Our results collectively imply that one of the key reasons ownership concentration falls as firms age is that when investor protection is strong, firms can raise capital and grow, diluting blockholders in the process.

The full paper is available for download here.