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This paper studies the effects of organizational form on managerial behavior and firm performance, from an empirical perspective. Managers of trusts are subject to stricter fiduciary responsibilities than managers of corporations. This paper examines the ramifications empirically, by exploiting data generated by a change in British regulations in the 1990s that allowed mutual funds to organize as either a trust or a corporation. I find evidence that trust law is effective in curtailing opportunistic behavior, as trust managers charge significantly lower fees than their observationally equivalent corporate counterparts. Trust managers also incur lower risk. However, evidence suggests that trust managers tend to underperform their corporate counterparts, even after adjusting for the differences in risk. These results show that the business flexibility granted by corporations leads to greater agency conflict and risk taking, but also to potentially superior risk-adjusted performance. An investor who invests $100,000 in a trust, instead of an equivalent corporation, would save about $100 per year in agency costs, but would forgo about $1,300 per year in gross risk-adjusted performance. The results have implications for corporate governance design, suggesting that heightened fiduciary duties can enhance investor protection by mitigating agency conflict and lessening managerial risk taking, but at the possible cost of inferior risk-adjusted performance.
Warburton, A. Joseph, "Trusts Versus Corporations: An Empirical Analysis of Competing Organizational Forms" (2010). College of Law Faculty Scholarship. Paper 84.
Agency Commons, Banking and Finance Commons, Bankruptcy Law Commons, Business Administration, Management, and Operations Commons, Business Law, Public Responsibility, and Ethics Commons, Commercial Law Commons, Corporate Finance Commons, Corporation and Enterprise Law Commons, Econometrics Commons, Finance Commons, Finance and Financial Management Commons, Law and Economics Commons, Management Sciences and Quantitative Methods Commons, Organizational Behavior and Theory Commons, Organizations Commons, Portfolio and Security Analysis Commons, Secured Transactions Commons, Securities Law Commons