Ownership Matters: Bringing Owners on Board

In his working paper, "The Impact of Ownership Type on Performance in Public Corporations: A Study of the U.S. Textile Industry 1983-1992," HBS assistant professor David L. Kang demonstrates that the ownership structure of large corporations can affect corporate performance.

Using archival sources, Kang examined data from all publicly held firms in the U.S. textile industry from 1983 to 1992. "I was able to look at an industry with different kinds of owners over a long period of time," Kang says. "This approach allowed me to make meaningful comparisons of performance among industry competitors and to measure whether owners could actually affect performance over time."

Kang's data reveal that there were 81 publicly held U.S. textile firms in 1983 whereas by 1992 only 47 such firms remained. "Because of low-cost foreign competition," Kang explains, "the 1980s were very challenging times for the U.S. textile industry. They enabled us to see clearly which companies did smart things in response to adverse conditions and which did not."

Coding this information for ownership type and gauging performance by return on assets and by the stock-price measure known as Tobin's Q , Kang found that three types of shareholders owning large blocks of a company's stock had a positive impact on the firm's performance: outside-director owners (shareholders who serve on the company's board of directors); sustained owners (shareholders who maintain their ownership over time); and family owners (shareholders who are descendants of the firm's founders). "The study suggests that these three owner types have sufficient formal authority, social influence, and expertise to enhance firm performance," Kang asserts. "For example, I found that when outside directors hold large blocks of stock in public corporations, those firms experience increased performance relative to competing firms whose board members lack such significant holdings.

"Sophisticated large-block owners are beneficial to company performance," Kang concludes. "It is well worth managers' time to educate them, communicate with them, and develop informal relationships with them so those owners will have a better understanding of what the company is trying to do."

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Who Gets the Credit for Bankruptcy?

The number of personal bankruptcies has increased dramatically in recent years, with more than 1.3 million consumers filing in 1997 alone. Believing that ease of filing is a major reason for the rise, Congress has sought to "get tough" with consumer debtors by passing a more stringent bankruptcy law. But in an article titled "The Rise of Consumer Bankruptcy: Evolution, Revolution, or Both?," forthcoming in the American Bankruptcy Law Journal, HBS associate professor David A. Moss and his former research associate, Gibbs A. Johnson, cast doubt on this strategy. They attribute the rise of consumer bankruptcy primarily to changes in consumer lending patterns, rather than to changes in the law that may have made filing easier.

The authors base their assertions on an analysis of historical data involving bankruptcies and consumer credit. "When consumer credit expanded dramatically in the 1920s," notes Moss in a recent interview, "so did consumer bankruptcies. In fact, ever since the beginning of the twentieth century, the number of consumer bankruptcies has been influenced much more by changes in the volume and distribution of credit than by any changes in the bankruptcy law."

The researchers found that until 1985, the number of consumer bankruptcy filings rose in almost perfect proportion to the amount of real consumer debt. "When consumer creditors lent more," explains Moss, "the number of filings quickly increased." After 1985, the number of bankruptcies per dollar lent increased significantly. "We attribute this change to the fact that consumer lenders, like credit card issuers, began lending precisely at this time to customers with much lower average incomes than they ever had before," he says.

In fact, contends Moss, policymakers could conceivably worsen the situation by tightening the rules. "We think that federal bankruptcy reformers may have their logic exactly backwards," he says. "The conventional wisdom in Washington is that tougher bankruptcy laws will discourage consumers from borrowing and thus keep them from filing. In our view, stricter rules will likely encourage consumer creditors to lend more freely, since tougher laws should make the collection process easier for them. An increased availability of credit may well result in more borrowing and, hence, more bankruptcies."

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