Individual and Institutional Ownership, Firm Age and Productivity

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