Controlling Externalities: Ownership Structure and Cross-Firm Externalities

In recent years, debates over the social purpose of corporations have taken center stage amidst rising concern about externalities (such as those associated with climate change and harmful speech) generated by firms. A key motivation is claim that government regulation liability regimes appear not to be functioning sufficiently well force firms internalize these externalities. There thus interest in exploring alternative mechanisms. particular, a rapidly growing body scholarship argues index funds increasingly approximate diversified “universal owners” incentives maximize portfolio value (and cross-firm externalities). However, much this analysis has focused on diffusely held US firms, while most world (including many important US), thought large contributors externalities, are controlled Could influence such externalities; if not, what other options might we consider? This paper examines related questions within more general conceptual framework for understanding how firms’ ownership structure corporate law affect internalization First, provide novel empirical evidence suggesting positioned their (in funds’ environmental engagements concentrated among countries dispersed structures). Second, document controlling shareholders common largest energy, automobile, technology sectors. Third, explore controllers introducing concept “controller wealth concentration” (CWC): fraction controller’s aggregate personal consists stock firm she controls. The lower CWC scope there controller hold investments affected created firm. low necessary (though sufficient) condition pecuniary incentive take into account (indeed, may effective than getting because status controllers). Fourth, construct measures global sample technology-focused For sample, very high relative portfolio, typically varying from 50% close 100%, despite existence minority structures (CMS) – dual class permit exert control holding modest cash flow rights. Thus, conclude undiversified constitute significant obstacle limiting ability universal owners encourage investee Are then steps can diversify more? Our suggests that, principle, CMS) hitherto ignored advantage allowing (thereby potentially mitigating Yet, find do even when they maintain through or CMS. We discuss possible reasons - including founders’ over-optimism need incentivize ongoing effort, defer capital gains taxes explain why fail diversify. diversify, but unlikely effects. Globally, structures. lack diversification makes it difficult identify mechanisms besides increasing enhancing (although solutions present own challenges).