Competition and Ownership Structure of Closely Held Firms

Abstract

We study how product market competition affects firms’ ownership structures using a large sample of closely held firms in eighteen European countries. We show that firms operating in more competitive environments have lower inside ownership and that the stakes of their outside shareholders are more dispersed. These results are explained by competition increasing the need to raise external equity and reducing private control benefits. Our findings suggest that, by changing corporate ownership structure, competition mitigates incentive misalignment among shareholders, leading to better firm performance and gains in economic efficiency. Received February 16, 2016; editorial decision November 9, 2016 by Editor Francesca Cornelli.