Abstract: Did the 1906 Armstrong Regulation Promote Separation of Ownership and Control in American Corporate Governance?

Mary Tone Rodgers


I examine how a state intrusion into the business practices of investment banking underwriting syndicates created conditions that promoted the separation of ownership and control in corporate governance. Insurance companies were expelled from syndicate participation by the New York state legislature in 1906. To fill the void left by the insurers, I test whether J. P. Morgan & Co. responded with a business process innovation that distributed securities directly to widely dispersed retail investors. With a logistic regression model, I find that retail offering circulars emerge as the innovation that improved access for individual investors to direct ownership of stocks and bonds, after controlling for the growth in aggregate national savings and new issue size. But why might investors take advantage of increased access to new security offerings? I suggest the motivation was to improve the efficiency of their portfolio holdings. I find that higher Sharpe ratios for individual portfolios accompany a reallocation of savings from indirect ownership of stocks and bonds through insurance policies to direct ownership of stocks and bonds.