Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-15T01:48:23.039Z Has data issue: false hasContentIssue false
  • English
  • Français

Externalities and Corporate Objectives in a World with Diversified Shareholder/Consumers

Published online by Cambridge University Press:  06 April 2009

Robert G. Hansen  and
John R. Lott Jr
Robert G. Hansen
Affiliation:
Tuck School, Dartmouth College, Hanover, NH 03755
John R. Lott Jr
Affiliation:
School of Law, University of Chicago, Chicago, IL 60637
Get access Rights & Permissions [Opens in a new window]

Abstract

If shareholders own diversified portfolios, and if companies impose externalities on one another, shareholders do not want value maximization to be corporate policy. Instead, shareholders want companies to maximize portfolio values. This occurs when firms internalize between-firm externalities. Any kind of externality, pecuniary or nonpecuniary, vertical or horizontal, suffices. What matters is simply that one company's actions affect another's value. Thus, besides the traditional benefit of risk reduction, portfolio diversification offers additional benefits to shareholders through helping internalize externalities. This paper documents the extent of diversification and cross-ownership of stocks among companies where these externalities are likely to be large and provides a capital market test of how merger offers vary with the extent of cross-ownership.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 31 , Issue 1 , March 1996 , pp. 43 - 68
Copyright
Copyright © School of Business Administration, University of Washington 1996

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Beatty, R., and Zajac, E.. “Managerial Incentives, Monitoring and Risk-bearing: A Study of Executive Compensation, Ownership, and Board Structure in Initial Public Offerings.” Unpubl. Manuscript, Southern Methodist Univ. (1994).Google Scholar
Becker, G. S. “Crime and Punishment: An Economic Approach.” Journal of Political Economy, 76 (03/04 1968), 169–217.CrossRefGoogle Scholar
Becker, G. S. “Comment on Peltzman.” Journal of Law and Economics, 19 (08 1976), 245–248.CrossRefGoogle Scholar
Brickley, J.; Lease, R.; and Smith, C.. “Ownership Structure and Voting on Antitakeover Amendments.” Journal of Financial Economics, 20 (1988), 267–291.CrossRefGoogle Scholar
CDA/Spectrum. Spectrum 3: Institutional Stock Holdings Survey. New York, NY: CDA/Spectrum (various issues 1989 to 1991).Google Scholar
Charlier, M. “Ray Roger's Strategies Popular, but Unions Divided over Him.” Wall Street Journal (03 1, 1985).Google Scholar
Chernow, R.The House of Morgan. New York, NY: Simon & Schuster Inc. (1990).Google Scholar
Coase, R. H. “The Problem of Social Cost.” Journal of Law and Economics, 3 (10 1960), 1–44.Google Scholar
DeAngelo, H. “Competition and Unanimity.” American Economic Review, 71 (03 1981), 18–27.Google Scholar
DeAngelo, H., and Rice, E. M.. “Antitakeover Charter Amendments and StockholderWealth.” Journal of Financial Economics, 11 (1983), 329–360.CrossRefGoogle Scholar
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (12 1985), 1155–1177.CrossRefGoogle Scholar
Directory of Pension Funds and their Investment Managers (1994).Google Scholar
Dooley, P. C. “The Interlocking Directorate.” American Economic Review, 59 (06 1969), 314–323.Google Scholar
Drucker, P. F. “Reckoning with the Pension Fund Revolution.” Harvard Business Review, 69 (03–04 1991), 106–114.Google Scholar
Eakins, S. “Institutional Investor Support of Managers: An Investigation of Tender Offers.” Quarterly Journal of Business and Economics, 32 (06 1993), 75–84.Google Scholar
Easterbrook, F. H., and Fischel, D. R.. “Corporate Control Transactions.” Yale Law Journal, 91 (03 1982), 698–737.Google Scholar
Easterbrook, F. H., and Fischel, D. R.. “The Proper Role of a Target's Management in Responding to a Tender Offer.” Harvard Law Review, 94 (04 1981), 1161–1204.CrossRefGoogle Scholar
Ekern, S., and Wilson, R.. “On the Theory of the Firm in an Economy with Incomplete Markets.” Bell Journal of Economics and Management Science, 5 (Spring 1974), 171–180.Google Scholar
French, K. R., and Poterba, J. M.. “Investor Diversification and International Equity Markets.” American Economic Review Papers and Proceedings, 81 (05 1991), 222–226.Google Scholar
Friedman, M. “Social Responsibility of Business is to Increase Profits.” The New York Times Magazine Section (09 13, 1970).Google Scholar
Gilson, R. J., and Kraakman, R.. “Reinventing the Outside Director: An Agenda for Institutional Investors.” Stanford Law Review, 43 (04 1991), 863–906.CrossRefGoogle Scholar
Gordon, L., and Pound, J.. “ESOPs and Corporate Control.” Journal of Financial Economics, 27 (1990), 525–556.Google Scholar
Gordon, L., and Pound, J.. “Information, Ownership Structure, and Shareholder Voting: Evidence from Shareholder-Sponsored Corporate Governance Proposals.” Journal of Finance, 48 (06 1993), 697–724.Google Scholar
Graven, K. “Pickens Poised Again to Battle Koito.” Wall Street Journal (06 18, 1990).Google Scholar
Grossman, S. J., and Stiglitz, J. E.. “On Value-Maximization and Alternative Objectives of the Firm.” Journal of Finance, 32 (05 1977), 389–402.CrossRefGoogle Scholar
Hallock, K. “Executive Pay and Reciprocal Interlocking Boards of Directors.” Working Paper, Princeton Univ. (01 1995).Google Scholar
Hansen, R. G. “A Theory for the Choice of Exchange Medium in Mergers and Acquisitions.” Journal of Finance, 60 (01 1987), 75–96.Google Scholar
Hansen, R. G., and Lott, J. R., Jr. “Czechoslovak Mutual Funds Fuel Reform.” The Wall Street Journal Europe (Friday, 07 17, 1992), 6.Google Scholar
Hirshleifer, J., and Riley, J.. Analytics of Uncertainty and Information. Cambridge, England: Cambridge Univ. Press (1992).CrossRefGoogle Scholar
Jarrell, G. A.; Brickley, J. A.; and Netter, J. M.. “The Market for Corporate Control: The Empirical Evidence since 1980.” Journal of Economic Perspectives, 2 (Winter 1988), 49–68.CrossRefGoogle Scholar
Jensen, M. C., and Long, J. B. Jr., “Corporate Investment under Uncertainty and Pare to Optimality in the Capital Markets.” Bell Journal of Economics and Management Science, 3 (Spring 1972), 151–174.Google Scholar
Jones, D. C., and Kato, T.. “The Scope, Nature, and Effects of Employee Stock Ownership Plans in Japan.” Industrial and Labor Relations Review (01 1, 1993), 352–367.CrossRefGoogle Scholar
Jung, G.-R.; Kenny, L. W.; and Lott, J. R. Jr., “An Explanation for Why Senators from the Same State Vote Differently So Frequently.” Journal of Public Economics, 54 (05 1994), 65–96.CrossRefGoogle Scholar
Karpoff, J. M., and Malatesta, P. H.. “The Wealth Effects of Second-Generation State Takeover Legislation.” Journal of Financial Economics, 25 (1989), 291–322.Google Scholar
Karpoff, J. M.; Malatesta, P.; and Walkling, R.. “Corporate Governance and Shareholder Initiatives: Empirical Evidence.” Working Paper, Univ. of Washington, Seattle, WA (1994).Google Scholar
Klein, B.; Crawford, R. G.; and Alchian, A. A.. “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process.” Journal of Law and Economics, 21 (10 1978), 297–326.Google Scholar
Lappen, A. A. “The SQUEEZE on Fees.” Institutional Investor, 28 (10 1994), 65.Google Scholar
Long, J. “Wealth, Welfare and the Price of Risk.” Journal of Finance, 27 (05 1972), 419–433.Google Scholar
Lott, J. R. Jr., “Does Political Reform Increase Wealth?: Or, Why the Difference between the Chicago and Virginia Schools is an Elasticity Question.” Public Choice (forthcoming, 1996).Google Scholar
Maloney, M. T.; McCormick, R. E.; and Mitchell, M. L.. “Managerial Decision Making and Capital Structure.” Journal of Business, 66 (1993), 189–217.CrossRefGoogle Scholar
Merton, R. C., and Subrahmanyam, M.. “The Optimality of a Competitive Stock Market.” Bell Journal of Economics and Management Science, 5 (Spring 1974), 145–170.Google Scholar
Morningstar Report (07 1994).Google Scholar
Nibley, M. “Your Workplace Employee Ownership No Guarantee of Success.” Atlanta Constitution (07 18, 1994), E1.Google Scholar
Peltzman, S. “Pricing in Public and Private Enterprises: Electric Utilities in the United States.” Journal of Law and Economics, 14 (04 1971), 109–147.Google Scholar
Peltzman, S. “Towards a More General Theory of Regulation.” Journal of Law and Economics, 19 (08 1976), 211–240.CrossRefGoogle Scholar
Pensions and Investments (01 24, 1994), 17.Google Scholar
Pettway, R. H.; Sicherman, N. W.; and Spiess, D. K.. “Japanese Foreign Direct Investment: Wealth Effects from Purchases and Sales of U.S. Assets.” Financial Management, 22 (Winter 1993), 82–95.CrossRefGoogle Scholar
Porter, P. K., and Scully, G. W.. “Economic Efficiency in Cooperatives.” Journal of Law and Economics, 30 (10 1987), 489–512.CrossRefGoogle Scholar
PR Newswire. “How to Minimize Costs and Hassles in Buying Stocks.” (01 21, 1993).Google Scholar
PR Newswire. “CREF Variable Annuities Post Strong Investment Returns for 1993.” (03 14, 1994).Google Scholar
Prowse, S. “The Structure of Corporate Ownership in Japan.” Journal of Finance, 47 (07 1992), 1121–1140.Google Scholar
Radner, R. “A Note on Unanimity of Stockholders' Preferences among Alternative Production Plans.” Bell Journal of Economics and Management Science, 5 (Spring 1974), 181–184.Google Scholar
Reynolds, R. J., and Snapp, B. R.. “The Competitive Effects of Partial Equity Interests and Joint Ventures.” International Journal of Industrial Organization, 4 (1986), 141–153.Google Scholar
Sametz, A. W., and Bicksler, J. L., eds. Institutional Investing: Challenges and Responsibilities of the 21st Century. Homewood, IL: Business One Irwin (1991).Google Scholar
Szep, J. “Top Global Fund Sees by Rewards in Asia.” Reutters Limited (12 5, 1994).Google Scholar
Tirole, J.The Theory of Industrial Organization. Cambridge, MA: MIT Press (1988).Google Scholar
Travlos, N. G. “Corporate Takeover Bids, Method of Payment, and Bidding Firm's Stock Returns.” Journal of Finance, 42 (09 1987), 943–963.Google Scholar
Wahal, S. “Pension Fund Activism and Firm Performance.” Journal of Financial and Quantitative Analysis, 31 (03 1996), 1–23.CrossRefGoogle Scholar
Woutat, D. “State Pension Fund Returns Not What They Used to be.” Los Angeles Times (04 4, 1993), D3.Google Scholar
Zingales, L. “Insider Ownership and the Decision to Go Public.” Working Paper, Univ. of Chicago (12 1994).Google Scholar