Managing Agency Problems in Early Shareholder Capitalism: Liverpool Transatlantic Shipping 1744-85

Abstract

Scholars have long debated the use of asset ownership to align incentives between mana-gers and shareholders. Yet empirical research concerning the relationship between equity owner-ship by chief executives and organizational performance remains mixed. We exploit a historical setting that offers an unusually clean test of an analogous relationship: captain-ownership of vessels engaged in transatlantic shipping from Liverpool during the 18th century. While contingent compensation could align incentives between captain and shipowners regarding most events, there existed at least one hazard that could not easily be managed by contractual incentives: the threat of capture by privateering vessels of an enemy nation. Maritime protocol generally provided that when a captain’s vessel was taken by privateers, the captain and crew would be treated reasonably well and returned to their home country expeditiously. Thus, upon being approached by a privateer, a captain’s could either give up and be treated well or fight and perhaps escape, but risk his life in the process. In this instance, conventional contract-based compensation was not sufficient to elicit the desired resistance by captains; in contrast, a captain who had equity ownership in the vessel would be more motivated to attempt to resist capture. The likelihood of encountering enemy privateers varied both with time (i.e., wartime vs. peacetime) and with voyage route. We exploit this variation to explore the effect of the capture threat on the pattern of captains’ vessel ownership, and the effect of such ownership on vessel performance. We find that vessels are significantly more likely to have a captain-owner when they undertake wartime voyages on routes that are particularly susceptible to encounters with enemy privateers. We also find, after addressing endogeneity concerns in the performance estimation, that for vessels with captain-owners are less likely to be captured than those with non-owner captains.