an earlier version of the paper is at
http://eres.bus.umich.edu/docs/dwpname.html
Inherited Wealth, Corporate Control and Economic
Growth: The Canadian Disease
RANDALL MORCK
University of Alberta ; Harvard University ;
National Bureau of
Economic Research (NBER)
DAVID A. STANGELAND
University of Manitoba
BERNARD YIN YEUNG
New York University
November 1998
NBER Working Paper No. W6814
Abstract:
Countries in which billionaire heirs' wealth is
large relative to G.D.P.
grow more slowly, show signs of more political
rent-seeking, and spend
less on innovation than do other countries at
similar levels of
development. In contrast, countries in which
self-made entrepreneur
billionaire wealth is large relative to G.D.P.
grow more rapidly and show
fewer signs of rent seeking. We argue that this
is consistent with
wealthy entrenched families' having objectives
other than creating public
shareholder value. Also, the control pyramids
through which they are
entrenched give wealthy families preferential
access to capital and
enhanced lobbying power. Entrenched families
also have vested interest
in preserving the value of existing capital. To
investigate these
arguments, we use firm-level Canadian data.
Heir-controlled Canadian
firms show low industry-adjusted financial
performance, labor capital
ratios, and R&D spending relative to other
firms the same ages and
sizes. We argue that concentrated, inherited
corporate control impedes
growth, and dub this the Canadian disease.'
Further research is needed
to determine the international incidence of
this condition. Finally,
heir-controlled Canadian firms' share prices
fell relative to those of
comparable firms on the news that the
Canada-U.S. free trade
agreement would be ratified. A key provision of
that treaty is capital
market openness. Under the treaty,
heir-controlled Canadian firms'
labor capital ratios rose, while the incidence
of heir-control fell. We
suggest that openness, especially of capital
markets, may mitigate the ill
effects of concentrated inherited control. If
so, capital market openness
matters for reasons not captured by standard
international trade and
finance models.
--
Michael Perelman
Economics Department
California State University
[EMAIL PROTECTED]
Chico, CA 95929
530-898-5321
fax 530-898-5901
