The Structure of Corporate ownership in Privatized Utilities

The purpose of this Paper is to study the determinants of the concentration of ownership in a privatized, regulated firm. The discussion illustrates some aspects of the costs and benefits of different corporate systems. Privatized utilities are large firms with professional management: there is a separation between ownership and control. The agency costs of this separation interact with the regulation of the product market. The main issue to be addressed here is how the degree to which regulators weigh investor profits when setting prices (the ‘regulatory climate’) affects the structure of corporate ownership, and more specifically the degree of shareholder concentration. Another, related issue, to be addressed is how deregulation affects corporate structure. In the benchmark case where the government maximizes privatization proceeds, it is shown that the optimal level of concentration increases with a tougher regulatory climate for investors. A more lenient regulatory regime increases the value of the commitment not to interfere implicit in a more dispersed ownership structure. Deregulation (through increasing monitoring costs) also pushes corporate structure in the direction of more ownership concentration. When political objectives are added to the analysis, it is shown that lobbying with managers induces levels of shareholder dispersion that are higher than in the benchmark case. Collusion with large shareholders, however, may yield higher concentration levels than in the benchmark. In the case of managerial lobbying, the leniency of the regulatory climate does not have any impact on the equilibrium stake of the blockholder, and has a negative impact on the difference between the political and the benchmark outcomes.