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Holding Stock And The Reins

Economic Trends

Holding Stock--and the Reins

Who says honchos' stakes are low?

Ever since the publication of the pathbreaking The Modern Corporation and Private Property in 1932, economists have bemoaned the separation of ownership from control of U.S. businesses. Authors Adolf A. Berle Jr. and Gardiner C. Means warned that corporate stock ownership had become so dispersed that control had passed into the hands of managers with little stakes in their companies and with private interests that often clashed with those of shareholders--and the economy.

Today, this issue is a primary concern of corporate governance experts. Particularly in recent years, they--and a growing number of shareholder groups--have been seeking ways to foster managerial ownership and to reinforce other mechanisms to hold management's feet to the fire.

But is overall managerial ownership really low, and has it actually declined over time? Not according to Clifford G. Holderness of Boston College, Randall S. Kroszner of the University of Chicago, and Dennis P. Sheehan of Pennsylvania State University.

Writing in the Journal of Finance, the researchers report that from 1935 to 1995, the ownership stakes of directors and senior officers of publicly traded U.S. companies rose sharply from an average 12.9% of their company's stock to 21.1%. And the average value of their combined holdings soared from $17.9 million (1995 dollars) to $73 million.

An intriguing question is what lies behind this rise in ownership stakes. One theory is that greater insider ownership has replaced other policies and economic trends that forced managers to focus on shareholder interests. In fact, the researchers note, such mechanisms appear stronger than ever. Performance-based pay, for example, is more common today, and corporate boards appear at least as vigilant. And com- petitive pressures and takeover threats are keeping managers on their toes.

What may be enhancing the trend toward managerial ownership is a significant decline in stock market volatility. With financial innovations helping to reduce volatility and the costs of hedging risk, the authors speculate that insiders have become more willing to hold larger stakes in their companies.

A key issue the study doesn't tackle directly is the possibility that rising managerial ownership could have negative effects. Indeed, past research focusing on the 1980s found that corporate performance tends to decline once the top brass' equity holdings rise above 5% (although it tends to improve as ownership increases from 0% to 5%). Presumably, many managers with hefty equity stakes in their companies begin to feel that they can pursue their private interests with relative impunity.

Interestingly, while the current study also found a positive effect on company performance as ownership approached 5%, it found no significant impact--negative or positive--of insider ownership above that level. So it may well be that the increase in other corporate control mechanisms in recent years is keeping many stock-rich managers in line.BY GENE KORETZReturn to top

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A Rising House of Cards?

Poorer borrowers use more plastic

What, me worry? With the strong economy, hefty income growth, and bulging stock portfolios, consumers have been spending--and borrowing--with abandon. Indeed, credit-card debt jumped by $22.5 billion in the six months ending in January, more than double the rise of the prior 12 months.

Since economic growth will probably slow over the year ahead, an interesting question is how consumers with credit-card debt will fare. A recent analysis by Federal Reserve Bank of New York economists suggests that a new class of borrowers may be especially at risk. It notes that the credit-card charge-off rate--a measure of bad loans written off by banks--jumped sharply when the economy slowed moderately in 1995 and continued to rise to a 25-year high in 1997, even after growth rebounded.

Fed survey data help explain why. From 1989 to 1995, as the percent of households with plastic rose from 56% to 67%, the share of cardholders with incomes less than $25,000 increased from 22% to 28%. Meanwhile, the average balance rose from $1,100 to $1,700, and the typical card-holder's liquid assets fell more than 25%.

In sum, poorer, riskier borrowers have been joining credit-card ranks in the 1990s and apparently taking on a lot of debt in the process. And it's this group, many of whom have low-level blue-collar jobs, who seem highly vulnerable to even a modest cyclical slowdown.BY GENE KORETZReturn to top

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