Working Paper: NBER ID: w23052
Authors: B. Zorina Khan
Abstract: Scholars engage in extensive debate about the role of families and corporations in economic growth. Some propose that personal ties provide a mechanism for overcoming such transactions costs as asymmetrical information, while others regard familial connections as conduits for inefficiency, with the potential for nepotism, corruption and exploitation of other stakeholders. This empirical study is based on a unique panel dataset comprising all of the shareholders in a sample of early corporations, including information on such characteristics as gender, age, occupation, household composition, real estate holdings and personal wealth. Related investing was widespread among directors and elite shareholders, but was also pervasive among women and small shareholders. Personal ties were especially evident among ordinary investors in the newer, riskier ventures, and helped to ensure persistence in shareholding. “Outsider investors” were able to overcome a lack of experience and information by taking advantage of their own networks. The link between related investing and the concentration of ownership in these corporations suggests that this phenomenon was likely associated with a reduction in perceptions of risk, especially beneficial for capital mobilization in emerging ventures. These patterns are consistent with a more productive interpretation of related investing and its function in newly developing societies.
Keywords: related investing; corporate ownership; capital mobilization; early industrialization
JEL Codes: D22; G32; L2; N21; N81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| related investing (G11) | capital mobilization (E22) |
| related investing (G11) | ownership concentration (G32) |
| related investing (G11) | persistence in shareholding (G34) |
| kinship ties (J12) | transaction costs (D23) |
| kinship ties (J12) | trust (G21) |
| trust (G21) | investment in riskier endeavors (G11) |
| related investing (G11) | participation of inexperienced investors in equity markets (G24) |