“Organizational Form and Firm Performance: Evidence from the ‘Death Sentence’ Clause of the Public Utility Act of 1935” by Francisco Perez-Gonzalez
Finance Seminar
Author:
Francisco Perez-Gonzalez
Stanford U
This paper investigates the importance of organizational form for firm performance. I exploit plausibly exogenous variation in organizational form resulting from the implementation of the Public Utility Holding Company Act (PUHCA) of 1935. PUHCA, through its so-called “death sentence” clause, forced geographically fragmented HCs to create more new standalone firms relative to other HCs that were geographically integrated. The main findings are five. First, PUHCA led to a drastic simplification of corporate wnership: over 40% of the sample firms ceased to be part of a HC. Second, subsidiaries of regionally fragmented HCs were three times more likely to become independent than subsidiaries of regionally integrated HCs. Third, using measures of HC regional fragmentation as instrumental variables for standalone status, I show that standalone firms are more productive, grow faster, and pay more dividends than subsidiaries of HCs. Fourth, I find evidence that HCs that legally challenged PUHCA were likely to extract rents from consumers. Lastly, consistent with superior HC tax arbitrage capabilities, standalone firms are less aggressive at tax minimizing strategies. Overall, the evidence stresses the inefficiencies of entrenched holding companies and challenges the notion that PUHCA led to the “death” of the industry as anticipated by its critics.
