Does Ownership Structure Matter?

• Date: 01 June 2017
• Published date: 01 June 2017
• Author: Sheridan Titman
• DOI: http://doi.org/10.1111/eufm.12120

Does Ownership Structure Matter?

Sheridan Titman

McCombs School of Business, University of Texas, Austin, Texas 78712

E-mail: titman@mail.utexas.edu

Abstract

Capital assets are held in a variety of ownership structures that can be

characterised by how they are taxed, whether or not their equity is publicly traded,

and by the relationship between the ownership of the assets and the management of

the assets. When taxes and regulations change, the popularity of the different

ownership structures change. These changes in ownership structure can affect how

the assets are managed, which can in turn influence innovation.

Keywords: corporations, master limited partnerships, real estate investment trusts,

private equity, family businesses

JEL classification: G31,G38

1. Introduction

Capital assets are held in a variety of ownership structures that can be characterized along

a number of dimensions. Some are public and some are private. Some are directly taxed

and others are what are known as pass-through vehicles, which pay no taxes themselves

and pass on their taxable income directly to their owners. Finally, some are large

diversified organisations while others are focused on just one line of business. This paper

provides some thoughts about these different forms of ownership and raises the

following questions:

1. Why do we observe this diversity of ownership structuresand to what extent does this

diversity reflect the diversity of asset types versus the diversity of investor types?

2. Can we characterise the types of assets that are held in the different ownership

structures? Is there a correlation between asset characteristics and ownership

structures? Why might some structures be more appropriate for some assets?

3. Do we understand why the popularity of different structures changes over time? To

what extent are the changes due to changes in taxes and regulations?

4. Does any of this really matter? Is there a link between how capital assets are owned

and how they are managed? Do some structures facilitate innovation better than

This paper was presented as the Keynote Speech at the 2016 EFMA conference in Basel,

Switzerland. I would like to thank the Editor John Doukas, and Jonathan Cohn and Amin

Shams for helpful discussions.

European Financial Management, Vol. 23, No. 3, 2017, 357–375

doi: 10.1111/eufm.12120

© 2017 John Wiley & Sons, Ltd.

others? Do policy choices that influence ownership structure affect efficiency and

innovation?

My thoughts on this topic are based mainly on my analysis of two industries, real estate

and energy. Close to 90% of the world’s physical assets (as opposed to intangible assets

like patents, brands, etc.) are used for either energy production or distribution or are some

type of real estate, and these assets are held in a wide variety of ownership structures that

include family businesses, public corporations, and various forms of both private and

public partnerships and trusts. While I will discuss differences in the types of assets held

in the different ownership structures, it is also noteworthy that the different structures

often hold very similar assets and in fact there are numerous examples of assets changing

hands from one ownership structure to another.

As illustrated in Figure 1, the composition of ownership structures has been changing

over time. The market capitalization of publicly traded common equity has grown

modestly in the U.S., however, as Doidge et al. (2015) note, the number of publicly

traded firms listed on major exchanges in the United States has dropped in half over the

past 20 years. While it is difficult to pinpoint the exact cause of this decline, it is partly

due to public firms being acquired by both other public firms and by private equity funds,

partly due to fewer private firms going public, and perhaps partly due to the increased

popularity of alternative forms of publicly traded entities, namely REITs and MLPs

(publicly traded real estate and energy investment vehicles that I will define shortly),

which have grown substantially in this time period. For commercial real estate we have

seen a substantial increase in the share of US commercial real estate held by REITs and

private equity firms over the past 20 years, and decreases in the amount held by

corporations and family offices. Over this same time period oil and gas assets and

pipelines in the continental United States have migrated from large integrated oil

companies to MLPs and smaller private equity funded entities.

There are a number of potential rationales for these ownership changes. Some of the

changes may have been precipitated by either structural changes in the economy or

technology changes that affected the efficiency of alternative ownership structures. For

example, improvements in information technology may have flattened the optimal

organisational structure, and this may have had an effect on the operating efficiency of the

alternative structures. While these technological shocks may be relevant, I will focus my

Fig. 1. Total Market Cap of Firms Listed on US Exchanges

Data Source: CRSP. [Color figure can be viewed at wileyonlinelibrary.com.]

© 2017 John Wiley & Sons, Ltd.

358 Sheridan Titman