The Effects of Corporate Control on Apparent Profit Performance

Abstract

The effect of the separation of ownership and control on the profit performance has been the subject of numerous research efforts. Palmer [14] presented evidence that management-controller (hence MC) firms with a high degree of monopoly power report significantly lower profit rates than owner-controller (hence OC) firms. Similar results were reported by Monsen, Chiu, and Cooley [13], Larner [8], and Kamerschen [11]. McEacheren [12] hypothesized and found that MCs were associated with lower systematic risk than OCs. To a large degree, the explanation for the findings was the presumed desire of managers of MCs to exhibit lower risk measures. And indeed, Boudreaux [5] found MCs' accounting returns to be less variable (risky) than OCs'. Except for McEacheren [22], all empirical studies tested for differences in accounting returns and did not attempt to relate them to market return and risk. Lev and Kunitzky [9] found the degree of smoothness of accounting manifestations of operating flows of firms to be strongly associated with systematic risk, but they made no distinction between MCs and OCs. Including the managerial job as an investment in a portfolio decision context, Amihud, Kamin & Ronen [1] showed analytically that managers in MCs will perceive an efficient frontier different from that faced by managing owners of OCs in a way that leads to preference for lower risk-return combinations.

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