THE PROFIT PERFORMANCE EFFECTS OF THE SEPARATION OF OWNERSHIP FROM CONTROL IN LARGE U.S. INDUSTRIAL CORPORATIONS*

Abstract

FROM 1961 to 1969 there was a growing separation of ownership from control in large U.S. industrial corporations. This separation affected three different aspects of the corporations' profit performance: average rate of return on net worth, the variability of rates of return, and the response of rates of return to changes in corporate profits tax rates. Independent variables used in the analysis of these phenomena were each firm's degree of monopoly power, size, and type of control. Degree of monopoly power for each firm was measured by weighting the barriers to entry into various industries by the percentage of that firm's total revenue derived from sales in each industry. The final measure of monopoly power was assigned to the three classes of high, medium, and low. Measures were made for each firm in 1965 and in 1969. Each firm's size was measured in sales, and firms were assigned to classes 1, 2, 3, and 4 corresponding to the 125 largest, the next 125, etc., as measured in 1965 and 1969. Firms were deemed to be management-controlled if no party owned more than ten per cent of the voting stock, weak owner-controlled if a party owned between ten and thirty per cent of the voting stock, and strong owner-controlled if a party owned more than 30 per cent of the voting stock. This variable was also calculated for each firm in both 1965 and 1969. The sample was all of the firms on Fortune's 500 list in 1965. For the first dependent variable, average rate of return on net worth, I found that among firms with a high degree of monopoly power, strong and weak owner-controlled firms reported significantly greater profit rates than management-controlled firms. The separation of ownership from control did not significantly affect profit rates for firms with less monopoly power, nor did allowance for an interaction effect with the size classes yield statistically significant results. These results and those which follow were based on statistical comparison tests which corrected for heteroscedasticity. For the variability of rates of return over time, I found that among the class of smallest firms, management-controlled firms had profit rates significantly more variable than either type of owner-controlled firms. For larger firms there was a similar but insignificant difference in profit rate variabilities by type of control. Degree of monopoly power had no effect alone or in interaction with the other independent variables on profit rate variability over time. The response of profit rates to tax rate changes took account of the tax cut of the early '60s and the surtax of the late '60s. Again, only among firms with a high degree of monopoly power did the separation of ownership from control appear to have any effect: weak owner-controlled firms had a significantly greater response to tax rate changes than did strong owner-controlled firms. The difference between weak ownerand management-controlled firms was not significant. The results for these three aspects of profit performance strongly support the hy-