Individual and Institutional Ownership, Firm Age and Productivity

Abstract

Total factor productivity represents a dimension of output that cannot be attributed to factors of production; it is unique to the firm, and central to its competitiveness. We posit that ownership structure plays a key role in productivity. However, ownership structure has an effect on productivity which changes with a firm’s age. Ownership structure that is optimal for new firms may not be optimal for older firms. We here consider the impact of ownership structure as defined by shares of individuals’ versus (broadly defined) institutional ownership. Our empirical counterpart draws on the UK company data for 2008-2017, obtained from the Orbis database. Our key explanatory variables are the joint share of the individual owners in equity and its square, but we also control concentration of ownership indices, along with a range of other firm-level characteristics. Applying fixed effects models along with instrumenting ownership with regional level variables, we found that new companies with majority individual owners and minority institutional owners outperform others. As firms age, however, these differences begin to disappear, with individual owners losing their control-related advantage. The results of the relative advantage of individual owners in the early stage is consistent with the property rights theory, which emphasises that residual control rights should remain with those whose investment is critical. It can be argued, however, that for whom the investment is critical changes as firm ages. Our managerial implications emphasise ownership competence in optimising ownership structure, which should evolve along the stages of the life-cycle of the firm