Corporate Ownership is not Always the Best Policy

Abstract

This paper explores the advantages (for large investors) of directly owning productive assets, compared with indirect ownership through stock in corporations. Significant factors are agency costs and recent changes in the tax and regulatory environment. Recent corporate scandals have led to legislative and regulatory responses that significantly increase the monitoring costs and other burdens of becoming or remaining a public corporation. As a result, there has been a substantial increase in going-private transactions, particularly among smaller public companies. However, the pressures to go private are not entirely new. We trace the legal concept that the corporation is an entity separate and apart from its owners, showing how the legal status of corporations hinders resolution of conflicts among the parties to the enterprise. Thus, there have long been fundamental flaws inherent in the corporation as the form of organization for certain activities. Direct ownership of major assets by investors prevents future expropriation of resources, and is preferable to corporate ownership whenever other alternatives for indemnification or liability limitation are available (such as insurance, limited partnerships, limited liability companies, etc.). Finally, the renewal of direct ownership is not a radical shift, but a return to long-established tradition in the organization of business activities.

Citation

Kensinger, J.W. and Poe, S.L. (2005), "Corporate Ownership is not Always the Best Policy", Chen, A.H. (Ed.) Research in Finance (Research in Finance, Vol. 22), Emerald Group Publishing Limited, Leeds, pp. 1-31. https://doi.org/10.1016/S0196-3821(05)22001-4