Trends in the Distribution of Stock Ownership [Reprint 2016 ed.] 9781512815344

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Trends in the Distribution of Stock Ownership

Trends in the Distribution of Stock Ownership by Edwin Burk Cox Associate Professor of Statistics Boston University

Philadelphia U n i v e r s i t y o f P e n n s y l v a n i a Press

© 1963 by the Trustees of the University of Pennsylvania Published in Great Britain, India, and Pakistan by the Oxford University Press London, Bombay and Karachi Library of Congress Catalog Card Number: 63-7855

7355 Printed in Great Britain by Charles Birchall & Sons, Ltd., Liverpool and London

To My Mother and Father

Contents Page 1

CHAPTER

INTRODUCTION I.

THE PROBLEM AND ITS IMPORTANCE The problem Importance of the problem Plan of the study Definitions

II.

EARLY EFFORTS TO MEASURE THE DISTRIBUTION OF STOCK OWNERSHIP Introduction Estimates of the number of record shareholdings An estimate of the number of beneficial shareholdings Estimates of the number of individuals owning stock Estimates of the distribution of stock by income of the owner Estimates of the distributions of shareholdings and shares by size or value of shareholding or by type of shareholder

III.

RECENT EFFORTS TO MEASURE THE DISTRIBUTION OF STOCK OWNERSHIP Introduction Estimates of the number of record shareholdings vii

6 6 7 10 12 16 16 19 27 27 32

34 39 39 40

viii

Trends in the Distribution of Stock Ownership

Page An estimate of the number of beneficial shareholdings Estimates of the number of individuals owning stock Estimates of the distribution of stock by income of the owner Estimates of the distribution of shareholdings and shares by size or value of shareholding or by type of shareholder Estimates of the distribution of stock by other economic characteristics Estimates of the distribution of stock by various economic characteristics within limited groups of stockholders Distribution of persons owning stock by various economic and social characteristics THE DISTRIBUTION OF STOCK OWNERSHIP AS REVEALED BY SHAREHOLDER OF RECORD DATA FOR LARGE COMPANIES V. THE DISTRIBUTION OF STOCK OWNERSHIP AS REVEALED BY DIVIDEND INCOME REPORTED ON FEDERAL INCOME TAX RETURNS VI. THE DISTRIBUTION OF STOCK OWNERSHIP AS REVEALED BY SURVEYS OF COMPANIES' STOCKHOLDERS VII. CONCLUSIONS AND RECOMMENDATIONS Conclusions Recommendations Appendix Bibliography Acknowledgments Index

43 45 48 51 56 60 67

IV.

71

99

146 197 197 202 207 211 217 219

Tables Page 1. Estimates of the total number of shareholdings of record, 1900-1959 2. Estimates of the number of individuals owning stock, 1924-1959 3. Percentage distribution of shareholdings of record and shares, by type of shareholder 4. Distribution of shareholdings of record and shares and estimated distribution of beneficial shareholdings and shares, by type of shareholder, 1952 5. Percentage distribution of respondents to 1957 Merrill Lynch customer survey, by income and value of securities owned 6. Percentage distribution of respondents to 1957 Merrill Lynch customer survey, by occupation and value of securities owned 7. Percentage distribution of respondents to 1957 Merrill Lynch customer survey, by age and value of securities owned 8. Distribution of stockholders and incidence of stock ownership in selected groups of the population 9. Distribution of adult stockholders who first purchased stock between 1956 and 1959, by selected characteristics 10. A group of large U.S. corporations, distributed according to percentage of all common stockholders of record in selected categories

26 33 52

54

63

64

65 68

69

75

Trends in the Distribution of Stock

Ownership

Page 11. A group of large U.S. corporations, distributed according to percentage of all preferred stockholders of record in selected categories 12. A group of large U.S. Corporations, distributed according to percentage of common shares held by selected types of holders of record 13. A group of large U.S. corporations, distributed according to percentage of preferred shares held by selected types of holders of record 14. Average per cent of common shares held by selected types of holders of record, by type of company 15. Coefficients of rank correlation between percentage of shares held by selected types of holders of record and value of selected characteristics of issue 16. A group of large U.S. corporations, distributed according to percentage of common shares held in large record holdings, shown for holdings cumulated from largest to selected percentages of all holdings 17. Average per cent of common shares held in largest 5, 20, and 50 per cent of record holdings, by type of company 18. Coefficients of rank correlation between percentage of shares held in largest 5, 20, and 50 per cent of record holdings and value of selected characteristics of issue 19. Coefficients of rank correlation between percentage of common shares held in largest 5, 20 and 50 per cent of record holdings and percentage of common shares held by selected types of holders of record 20. Percentage of common shares held in holdings cumulated from largest to selected percentages of all holdings, by category of record holder for the Chase Manhattan Bank and Columbia Gas System 21. Effects of stock splits on the size distribution of stockholdings of record

76

77

78 82

84

86

87

88

89

91 97

Tables

xi Page

22. Yields of traded and untraded stocks held, for income groups of Wisconsin individuals, 1949 23. Dividend income and capitalized value of dividend income, for income groups of Wisconsin individuals, 1949 24. Shares of upper income groups in total income and dividend income, U.S., 1913-1948 25. Shares of upper income groups in total income and dividend income, U.S., 1939-1957 26. Estimated percentage of dividend income received by groups of the population, ranked by total income, U.S., 1952 27. Estimated percentage of dividend income received by groups of dividend recipients, ranked by dividend income, U.S., 1928 28. Estimated percentage of dividend income received by groups of dividend recipients, ranked by dividend income, U.S., 1956 29. Characteristics of stockholders of the National Steel Company, by income group 30. Estimated percentage distribution of individuals owning du Pont common stock, by 1957 income and size of holding 31. Estimated percentage distribution of du Pont common stock owned by individuals, by 1957 income of owner and size of holding 32. Atlantic Refining Company: Response rates among individual common stockholders, by status of holding and size of holding 33. Atlantic Refining Company: Response rates among individual preferred stockholders, by status of holding and size of holding 34. Atlantic Refining Company: Estimated percentage distribution of common stockholders with holdings

101

102 118 126

133

139

142 150

168

169

173

174

xii

Trends in the Distribution of Stock

Ownership

Page

35.

36.

37.

38.

39.

40.

41.

42. 43.

of less than 1,000 shares, by occupation of family head and size of holding Atlantic Refining Company: Estimated percentage distribution of preferred stockholders with holdings of less than 200 shares, by occupation of family head and size of holding Atlantic Refining Company: Estimated percentage distribution of common stockholders with holdings of less than 1,000 shares, by age of family head and size of holding Atlantic Refining Company: Estimated percentage distribution of preferred stockholders with holdings of less than 200 shares, by age of family head and size of holding Atlantic Refining Company: Estimated percentage distribution of common stockholders with holdings of less than 1,000 shares, by family income and size of holding Atlantic Refining Company: Estimated percentage distribution of preferred stockholders with holdings of less than 200 shares, by family income and size of holding Atlantic Refining Company: Estimated percentage distribution of common stockholders with holdings of less than 1,000 shares, other than retired persons, by family income and size of holding Atlantic Refining Company: Estimated percentage distribution of preferred stockholders with holdings of less than 200 shares, other than retired persons, by family income and size of holding Distribution of individual stockholders by occupation, as shown by company studies and other sources Distribution of individual stockholders by age, as shown by company studies and other sources (table

175

176

178

179

180

181

183

184 187

Tables

xiii

Page shows percentage of individual stockholders less than indicated age) 189 44. Distribution of individual stockholders by income, as shown by company studies and other sources (table shows percentage of individual stockholders with less than indicated income) 191 45. Cumulative percentage distributions of shareholders and shares, by income group for selected companies, 1935-1959, and of dividend recipients and dividend income, 1956 193 CHARTS 1. Shares of upper income groups in total income, U.S. 1913-1957 2. Shares of upper income groups in dividend income, U.S., 1917-1957

122 122

INTRODUCTION THE PRIMARY PURPOSE OF THIS STUDY IS TO ESTIMATE THE PAST AND

present distributions of corporate stock owned by individuals, according to such characteristics as the size of the holding and the income, age, and occupation of the holder. To accomplish this purpose, we have determined the extent to which satisfactory estimates have been made or can be made with existing data and methodology. Recognizing that these estimates are not entirely satisfactory, we have tried to add to the available data, develop improved means of estimating, and suggest work beyond our means which would produce even more fruitful results. This study was completed in June, 1960. The analysis and findings are based on the data then available. However, subsequent events have conformed closely to the pattern of development taking place then and demand no change in the conclusions reached or the recommendations made at that time. At the end of 1957 individuals owned directly 70 per cent of the corporate stock outstanding and not owned by another corporation. 1 These holdings were valued at that time at $210 billion. Personal trust funds administered by banks held another 14 per cent and non-profit organizations about 6 per cent. The remaining 10 per cent was held by financial institutions, includ1 New York Stock Exchange Fact Book, 1958 (New York: New York Stock Exchange, 1958), p. 34; and U.S. Board of Governors of the Federal Reserve System, Federal Reserve Bulletin (August, 1959), p. 1056.

1

2

Trends in the Distribution of Stock Ownership

ing investment companies, insurance companies, non-insured pension funds, and mutual savings banks. Despite the emphasis which has been placed on the growing importance of institutional investors in the market during the 1950's, in 1960 individual owners continue to represent the most important group of holders of equities. Between 1949 and 1957 the holdings of institutional investors, including insurance companies, investment companies, non-profit institutions, non-insured pension funds, and mutual savings banks, increased from 12.4 per cent to 15.3 per cent of the value of shares listed on the New York Stock Exchange.2 This eight-year period was one of extremely rapid growth for the institutions most often credited with increasing the relative importance of institutional investments, investment companies and pension funds. Yet the relative importance of institutional ownership rose less than three percentage points. This study does not attempt to trace changes in the distribution of control over the corporate sector of the economy. To do so would require information very different from and far less accessible to the individual investigator than that used here. We are interested in stock as one major component of individuals' financial assets, as an important source of individuals' income, and as a sign that the owner has provided equity capital to a corporate enterprise. A useful guide to sources of future equity capital is knowledge of the present distribution of stock ownership. The number of persons who own some stock, regardless of how much, has often been used as an indication of the distribution of stock ownership. The number of shareholdings has been used in this way, also. (The shares owned by one owner in any particular issue constitute a shareholding in that issue.) These are both unsatisfactory methods for measuring the distribution of stock ownership because neither one takes into consideration the amount of stock held by each individual or the number of 2

New York Stock Exchange Fact Book, 1958, p. 35.

Introduction

3

shares in each holding. In this study we have discussed such estimates that other investigators have made. Our emphasis, however, has been placed on estimating distributions of stock owned by individuals by the size of the holding or the amount of stock owned. We have also looked into the evidence on interrelationships between size of holding or amount of stock owned and the income, age, and occupation of the individual holder. The results of our research may be summarized briefly as follows. The number of stockholders in 1960 was approximately twelve million, or one adult in eight. This is probably larger than the number at any previous time, but the ratio is probably no higher than in 1930, when there were perhaps ten million individual stockholders. The number rose rapidly between 1927 and 1930, starting at less than five million. Between 1930 and 1950 the total declined to a low of about six million in the late 1940's, after which it began to rise. The number of shareholdings in 1960 is about thirty-eight million. This figure rose rapidly between 1927 and 1930, fell little between 1930 and 1950, and rose between 1950 and 1960, though not so rapidly as the number of stockholders. The distribution of stock in specific issues, by size of holding, became less concentrated during the period 1937-1957, with most of the change occurring in the first ten years. As indicated by the distribution of dividend income, the distribution of stock in all issues combined, by income of the holder, has become less concentrated between 1917 and 1957. The periods of greatest change have been 1926-1935 and 1937-1943. At the end of 1957, the top 1 per cent of income recipients received 39 per cent of total dividends paid to individuals, while the top 10 per cent received 59 per cent. The very limited evidence available indicated a substantial decline between 1928 and 1956 in the degree of concentration of stock ownership in all issues combined by amount of stock owned by the holder. Even so, the concentration which existed as of 1956 is quite high, as the 2

4

Trends in the Distribution of Stock

Ownership

following figures indicate. In 1956, the 1 per cent of dividend recipients with the largest dividend income received at least 26 per cent of all dividends paid to individuals. The 10 per cent with the largest dividend income received at least 55 per cent. There is no very useful information on changes in the distributions of particular issues or all issues combined according to age or occupation of the holder. However, it is clear that stock tends to be concentrated among older owners (fifty years of age or more) and those in professional, managerial, or enterpreneurial positions. In its central purpose and in some methodology used, this study resembles the report by the Securities and Exchange Commission to the Temporary National Economic Committee of the 76th Congress, entitled The Distribution of Ownership in the 200 Largest Non-financial Corporations.3 While this earlier report was concerned mainly with the ownership of a limited group of companies in 1937, one chapter dealt with various aspects of the distribution of ownership of all equity issues, at the time of the study and in earlier years. In the present study many of the findings of this report to the Temporary National Economic Committee have been incorporated and supplemented with the most recent data available. Prior to our work, the report to the Temporary National Economic Committee was undoubtedly the most thorough and comprehensive study of stock ownership available. Using types of data not available in 1937 and more elaborate analytic techniques, we believe we have added significantly to the available knowledge on the subject. In one respect we have been unable to supplement or update the findings of the earlier work. The identification of the owners of the twenty largest holdings in 200 different companies enabled the Securities and Exchange Commission to determine the individuals exercising effective control of these companies. * U.S. Congress, Temporary National Economic Committee, Monograph 29: The Distribution of Ownership in the 200 Largest Non-financial Corporations (76th Congress, 3rd Session, 1940).

Introduction

5

This information can be obtained by an agency of the Federal government but not by an individual investigator. It is hoped that the present study will bring to the reader's attention certain important facts concerning the distribution of stock ownership and changes which have taken place in the distribution, as well as the need for improved statistical information on this important area of economic knowledge. October 1961

I The Problem and its Importance The Problem IN A NATION WHOSE ECONOMY IS CHARACTERIZED BY PRIVATE

ownership of the means of production, the distribution of this ownership among the population is a matter of importance. Although there are many businesses in this country owned by an individual proprietor or by several individuals in partnership, the dominant form of business organization in teims of assets, sales, or employment is the corporation. Ownership of the corporation rests in the hands of the stockholders, the persons and institutions who have purchased shares of stock issued by the company. The extent to which different groups of individuals participate in the economy as owners of stock changes with time. At a given time personal factors such as income, wealth, age, and occupation greatly influence whether a person will choose to own stock and, if he does own stock, the amount and particular issues he owns. His appraisal of the current and future state of the economy also has an important bearing on his decision. The distribution of stock owned by individuals is not static but changes over time as individuals choose to alter their role as stockholders. The problem which generated this study is the importance of and need for measurement of this distribution at the present and during the past so that changes may be seen. The problem is complex because not only are there different distributions for 6

The Problem and its Importance

7

different points in time but at any one time there are many different distributions, not just one. Each equity issue may be studied separately. The issues of a company or an industry may be grouped and studied as a unit. All issues of all corporations may be viewed as a whole and studied together. There is the further question of the variable in terms of which the distribution is to be expressed. We may study the distribution according to any one of a number of characteristics of the holder, such as the size of his holding in a particular issue or the size or value of his holdings of all issues, his holdings of other types of assets, his income, his age, his occupation, etc. In the present study we have dealt with the central problem in several ways. We have taken data readily available from published sources and made numerous estimates from them. We have assembled primary data and made other estimates from these. Finally, we have suggested procedures which we could not follow because of limited time and financial resources, which, we believe, would lead to better estimates than any presently available. Importance

of the Problem

Knowledge of the distribution of corporate equities owned by individuals is valuable for several reasons. For the individual owner, stock owned by him represents a portion of his personal assets. The distribution of stock among individuals is, therefore, one component in the distribution of wealth among individuals. Other types of individuals' assets, such as demand deposits, savings deposits, bonds, life insurance, interests in sole proprietorships or partnerships, real property, etc., may be distributed differently among the population. More thorough study of the distributions of ownership of these other types of assets, utilizing some of the methodology employed in this study, would make possible a careful analysis of the differences among these distributions. The characteristics which distinguish these assets from each other would explain the differences in these

8

Trends in the Distribution of Stock

Ownership

distributions. Our findings will indicate which groups of individuals are willing to hold an asset with the particular advantages and disadvantages of corporate stock and in what amounts. The composition of financial assets held by groups of individuals varies according to the characteristics of the group. Together with knowledge of the distributions of the other types of assets, our findings will help explain these differences in composition. In recent years much publicity has been given to the increase in the number of individuals who own stock. This development has been described as the advent of "People's Capitalism," or the widespread participation by individual investors in corporate ownership. The publicity given this phrase frequently conveys the impression that the relative importance of all persons who own stock is the same and that the benefits derived from owning stock accrue in equal measure to all stockholders. The inequality in the distribution of stock owned among individuals, while not denied, is simply ignored. Such a situation invites attack by critics such as Victor Perlo, who, in his recent article,1 contends that there has been no movement toward the widespread ownership implied by the phrase "People's Capitalism." "The basic claim of 'People's Capitalism', that the rank and file of the population are becoming owners of the means of production in American industry, is without foundation in fact." 2 Perlo's conclusion is based on his interpretation of a number of secondary sources, many of which we shall mention later. His article contains no new evidence. Perlo seems to accept the desirability of achieving a "People's Capitalism," arguing only that it has not arrived. At least one writer, James Logan of the Tuck School,3 questions its desirability on the ground that stock ownership requires knowledge, 1 Victor Perlo, " 'People's Capitalism' and Stock Ownership," American Economic Review, XLVIII, No. 3 (June, 1958), 333-347. 5 Ibid., p. 347. 3 James P. Logan, Everyone a Stockholder?: Problems in Broadening Shareownership (Hanover, New Hampshire: Amos Tuck School of Business Administration, Dartmouth College, 1956).

The Problem and its Importance

9

financial resources, and ability to withstand financial uncertainty and possible loss that most individuals do not have. Put succinctly, Logan seems to feel that most people should not be stockholders for their own good. In the midst of this debate, our findings should aid in resolving some of the disagreement over facts. Changes in the pattern of stock ownership may be related to price phenomena in the stock market. Our findings will perhaps be useful in testing hypotheses regarding such relationships. The fact that the proportion of adults in the population who are stockholders in 1960 is as high as it was in 1929, preceding the prolonged decline in prices which began in that year, may be cause for concern. Of course, other relevant considerations must be kept in mind when discussing market-price phenomena. The extent and size distribution of ownership are only two of the important factors. The ownership of stock generally leads to the receipt of dividend income. Thus, the distribution and changes in the distribution of stock ownership are closely related to the distribution and changes in the distribution of dividend income and through these have a bearing on the size distribution of total income. In particular, the concentration in the size distribution of dividend income, together with other property income (interest and rent), is responsible in substantial degree for the concentration in the size distribution of total income. Changes in the concentration in the size distribution of dividend income have a marked effect on the concentration in the size distribution of total income. The criteria used in judging the desirability of more or less concentration in these distributions are often rather subjective. The matter is, nonetheless, important in at least two respects. First, concentration in the income size distribution may be a necessary consequence of an efficiently functioning, growing economy. Successful risk takers, essential in such an economy, are rewarded more than others. Second, concentration which exceeds a certain degree (which is established

10

Trends in the Distribution of Stock

Ownership

subjectively) disturbs some observers' sense of equity or justice. The incidence of a tax on dividend income can be seen with the aid of our findings. The age, occupational, and income groups which would be affected should be known when such a tax is considered. Firms seeking new capital funds must, on occasion, seek them through the sale of shares to investors. Knowledge of the groups within the population which provided funds in the past gives an indication of likely sources of new funds. A specific company, whose issue has peculiar characteristics because of the nature of the company (its size, age, or product), will be especially interested in the distribution of ownership of its own outstanding shares and the shares of other companies with similar characteristics. The distribution of ownership of the stock of a particular company is of interest to the management of that company for other reasons. The nature of its ownership may influence a company's policies with respect to the payment of dividends in cash or stock, the frequency of dividend payments, and the fraction of profits to be paid out in cash dividends. Western Union has instituted a program of periodic personal interviews with larger stockholders to solicit their views on company practices. While such a program might not be practicable if extended to all stockholders, it suggests the importance to management of knowledge concerning the company's stockholders and their opinions. Less costly means are available for reaching and learning about small stockholders. In a broader perspective the impact of capital gains versus ordinary income taxation on different groups in the population can only be studied through data of the type discussed in this study. Plan of the Study Following the presentation and discussion of the problem in

The Problem and its

Importance

11

the present chapter, a review of the contributions by other authors to the literature on stock ownership is given in the next two chapters. Each of the three succeeding chapters is devoted to an analysis of a body of data which provides evidence on a particular aspect of stock ownership. In Chapter IV, data from individual companies on the distribution of their shareholdings of record by type of holder and size of holding are analysed. Some idea of differences in these distributions among companies and of changes over time in the distribution of ownership in a particular company can be gained from this analysis. An investigation is made of relationships between the characteristics of these distributions for specific companies and the price per share of the stock, percentage yield on the stock, percentage of profits distributed as dividends, and asset size of the issuing company. The influence of stock splits on these distributions is considered. The analysis is entirely in terms of shareholdings of record, not in terms of individuals. As explained in the following section on definitions, shareholdings of record include holdings of individuals, institutions, fiduciaries, brokers, and banks. The latter often act as holders of record for shares owned by others. An attempt is made in our analysis to adjust for this phenomenon. In Chapter V, the distribution of dividend income as reported by recipients on their individual income tax returns is studied. These data are taken from Statistics of Incomean annual tabulation of material from Federal income tax returns. The method of analysis used is a considerably modified form of the one developed by Simon Kuznets in Shares of Upper Income Groups in Income and Savings,6 Dividend income data are studied for two reasons. As a component of personal income, the distribution of dividend income among the population is of economic importance. More important from the viewpoint of 4

U.S. Bureau of Internal Revenue, Statistics of Income, 1913-1957. Simon Kuznets, Shares of Upper Income Groups in Income and Savings (New York: National Bureau of Economic Research Inc., 1953.) 5

12

Trends in the Distribution of Stock Ownership

this study, dividend income—as an approximate indicator of the amount of stock owned by an individual—can be used as a proxy variable in studying the distribution of stock by income groups. In Chapter VI, data collected through surveys of the stockholders in certain individual companies are presented. The stockholder survey has been used by companies to any significant extent only in the past decade. To our knowledge, this study is the first to bring together the results of a large number of these surveys and compare and evaluate the methods employed in carrying them out. To investigate the possibility of increasing the usefulness and accuracy of the stockholder survey, the author conducted a survey among the stockholders of the Atlantic Refining Company. The results are shown in Chapter VI. The final chapter summarizes the findings of the study. Recommendations for further work are also given. Definitions We are concerned with the phenomenon of stock ownership by individuals, or the immediate legal possession by an individual of an equity interest in one or more corporate enterprises. This does not include indirect ownership through trusts, life insurance companies, pension funds, banks, or other financial intermediaries, though we shall give some attention to ownership by these institutions. We have restricted the study to direct ownership because the extent of such ownership by an individual indicates the extent to which he has deliberately chosen to accept the risks and rewards which this particular type of asset affords. Life insurance, accumulations in pension funds, demand deposits, or savings accounts are types of assets held for different reasons. Holding these assets may entitle an individual to some of the risks and benefits arising from stock ownership in an indirect way, but, by choosing them, he has shown a desire (or someone else has made the choice for him)

The Problem and its Importance

13

to enjoy the advantages inherent in these assets that are not found in direct ownership of stock. Since our interest lies in a relationship between two objects, definitions must be given for two units, one a unit of enumeration (for the stockholder) and one a unit of measurement (for the stock held). Ideally, we might establish a set of definitions in terms of which the remainder of the study would be phrased. Practically, this is impossible because the various studies and bodies of data available are couched in terms of many different definitions. A great part of the study is concerned with this problem, and, therefore, only an outline will be given here. For a given share, the stockholder is defined as the person who is entitled to receive the dividends, cast the votes, and exercise the right to sell to which the owner of that share is entitled. However, stock is often owned jointly by two or more persons. In such a ease a problem of allocation arises if the several owners are not all in the same category with respect to the socioeconomic characteristics being studied. Or, since joint holdings are generally those of husbands and wives, perhaps only the characteristics of the husband should be used in allocating the holding to a category on the theory that he is the head of the household. Women are often the legal owners of stock only because their husbands chose to register the stock that way. It would be misleading to infer that in any real sense such women are stockholders. It will be seen that, for the purposes of analysis, the accepted notion of a stockholder is unsatisfactory. The ideal definition of a stockholder for many purposes will cover not necessarily an individual but an investing unit which would consist of a person or all persons who are affected by the investment decisions of one or more members of the unit. In most cases, though perhaps not all, this would correspond to the consumer spending unit as defined in the Federal Reserve Board's Survey of Consumer Finances. 6 The investing unit would be 6

Federal Reserve Bulletin (August, 1959), p. 1056.

14

Trends in the Distribution of Stock

Ownership

the origin of investment funds, the recipient of dividends and capital gains or losses, and the repository of the rights which go with stock ownership. Such a concept has been used in one recent study. In a stockholder survey one of the largest corporations employed the concept of an investment decision maker, defined to be essentially the head of an investing unit. Several studies have used the family as the unit associated with ownership rather than only the legal owner of the share. When corporate shareowner records are used to study shareownership or select samples of individual stockholders, a peculiar problem arises from the fact that not all individual stockholders are known to the company. When an individual or a group of individuals buy stock for their own benefit (i.e., not in a fiduciary capacity), they may elect to appear or not to appear on the corporate records as owners of these shares. In the latter event their shares are included with others in the holding of a stockbroker or a bank which appears on the records without identification of the true owners of the shares. The holdings shown on corporate records are spoken of as shareholdings of record. Beneficial holdings of individuals include both holdings registered in the name of the individual owner and holdings registered in the name of a stockbroker or other nominee but beneficially owned by an individual. This distinction between record holdings and beneficial holdings will be very important in the discussion of later chapters. Wherever individuals' holdings are rpentioned in connection with corporate shareowner records, the reference is to the collection of holdings in the names of one man, one woman, or two or more persons (joint holdings). Any departure from this usage will be noted. The definition of the appropriate unit for measuring that which is owned, the stock, needs to be broken into two parts. If only one issue is to be studied, the share is undoubtedly quite satisfactory. Adjustments should be made for splits and stock dividends. The earning power, voting power, and selling price of a holding are all directly proportional to the number of shares

The Problem and its Importance

15

in it. In short, the share is an homogeneous unit signifying the same thing in all holdings. The selection of a unit of measure is more difficult if many issues are grouped together for study. The share is clearly not an homogeneous unit from issue to issue. Shares differ in earning power, proportional voting power, and price. Yet shares are often used because data are readily available in terms of shares and there is some reason to believe that, within the portfolios of large groups of persons, differences among characteristics of shares will average out. A better unit, which has been used more often than the share, is a dollar of market value. For measuring the demonstrated capacity of a group to provide investment funds and estimating their future investment potential, the dollar is the best measure. The importance of stock as a source of income is shown best by using a dollar of dividend income as the unit of measure. We will discuss this unit at length in connection with our analysis of the dividend income data from Federal income tax returns.

II Early Efforts to Measure the Distribution of Stock Ownership Introduction BEFORE

ATTEMPTING

TO

CONSIDER

IN

DETAIL

THE

PRESENT

distribution of stock ownership, some consideration must be given to the work which has been done previously in this area. In this chapter and the one which follows we shall attempt to do this. Past efforts to describe the distribution of stock ownership have taken various forms, depending partly on the information available and partly on the method of measuring distribution used by the investigator. Thus we find instances where distribution has been measured in terms of changes in the total number of shareholdings of record as shown on the books of a relatively small number of corporations. The extremely limited usefulness of such a concept was occasionally noted by the authors but frequently not. Other students have attempted estimates of the total number of shareholdings of record in all United States corporations. Such all-inclusive estimates are more desirable theoretically but must involve a number of assumptions and approximations. Consequently they are subject to criticisms not applicable to the limited tabulations for specific companies. While corporation records provide an accurate count of the number of book shareholdings, they do not show anything about the beneficial stockholders whose holdings are registered with the corporation as a unit in the name of a broker or of a bank nominee. If a change in the number of beneficial holdings 16

Early Efforts to Measure the Distribution of Stock Ownership

17

(contrasted with shareholdings of record) is considered a better measure of change in the distribution of ownership, consideration must be given to estimating the number of beneficial holdings represented by holdings of brokers and nominees. We shall find that seldom has this matter been given any consideration in studies of the distribution of stock ownership. Estimates of shareholdings of record, even when supplemented by estimates of the number of beneficial shareholdings, may show change in the number of shareholdings but cannot show change in the number of individual stockholders unless one assumes (1) no concurrent trend towards or away from diversification of holdings and (2) no tendency for individuals' shareholdings to grow or decline as a proportion of total shareholdings. Recognizing this problem, several attempts have been made to estimate the number of individuals owning stock. The statistical evidence upon which these estimates must be based tends to be less satisfactory than that upon which estimates of shareholdings are based. As a result, estimates of the number of individuals owning stock have generally been stated as a range with the upper limit 15 to 25 per cent larger than the lower. It will be seen that each of the attempts to measure the distribution of ownership mentioned thus far has implicitly given each shareholding, or individual stockholder, equal weight. Such measures can portray trends in distribution of ownership only in a very limited sense. If "diffusion" be thought of as the antonym of "concentration," a large increase in the number of shareholdings could take place, i.e., greater "diffusion," with a negligible decrease in " concentration." Any conclusive treatment of the trends in distribution of ownership must deal with changes in the distribution of stock among income groups of stockholders and among size and value of shareholdings groups, in addition to changes in number of shareholdings and stockholders. By studying the stock rather than shareholdings or stockholders, the appropriate weight is automatically given to each holding and to each stockholder's holdings. A number of

18

Trends in the Distribution of Stock Ownership

writers have utilized the material on dividend income reported by the Bureau of Internal Revenue from Federal income tax returns 1 to construct estimates of the distribution of stock by income of the holder. Only two broad-based studies of the distribution of stock by size of holding groups and by value of holding groups are available, the earlier far more detailed than the later.* A few articles are available in industry or company publications with data showing the distribution of the stock of that industry or company by size of holding and for income of the holder. Three studies3 have made available, for fairly comprehensive lists of corporations, distributions of stock among types of stockholders, e.g., individuals, brokers and dealers, nominees, institutions, etc. While aggregating shares at such a level raises some methodological questions, the results are of some usefulness. It will be convenient for two reasons to divide our discussion of previous work into two parts, one covering the period through 1940 and the other the years since 1940. In reality the second period begins in 1947 since there appears to have been no published research on stock ownership during 1941-1946. The reasons referred to are closely related. In 1947 and subsequent years a great deal of information on the distribution of stock ownership has been gathered through personal interviews with sample groups, sometimes of the general population and sometimes of known investors only. We shall refer to the results of such interviews as sample survey data. Sample survey data were utilized only once or twice prior to 1947 in discussions of stock 1

U.S. Bureau of Internal Revenue, Statistics of Income, 1913-1957. • U.S. Congress, Temporary National Economic Committee (TNEC) Monograph 30, Survey of Shareholdings in 1710 Corporations with Securities Listed on a National Securities Exchange (76th Congress, 3d Session, 1940). See also Lewis H. Kimroel, Share Ownership in the U.S. (Washington, D.C.: The Brookings Institution, 1952). * Kimmel, ibid. See also Who Owns American Business? 1956 Census of Shareowners (New York: New York Stock Exchange, 1956), and Shareownership in America: 1959 (New York: New York Stock Exchange, 1959).

Early Efforts to Measure the Distribution of Stock Ownership

19

ownership. The use of the sample survey method introduces the possibility of collecting a wide variety of information but also the need to qualify quantitative findings and any inferences drawn from them in light of the sampling errors which are attendant upon the results of any sampling scheme. The second reason for considering the post-1946 sources separately grows out of the first. Through sample surveys, data on distribution of stock ownership by net worth group, liquid asset group, age group, and occupation group are available to add to data already available on distribution by income group and size of holding group. As a result, new light has been shed on many facets of our problem. We shall see that, although the quality of these data sometimes leaves something to be desired, the study of stock ownership has entered a new, more comprehensive phase. It will be apparent from the foregoing remarks that preceding studies have differed markedly in their approach to the study of distribution of stock ownership and, consequently, in their content and conclusions. In the sections to follow the sources are grouped according to the manner in which they measure distribution of ownership. Those studies which utilized several approaches are considered in each of the several appropriate sections. While the result is sometimes an unfortunately fragmented discussion of one source, it permits a comparison of all estimates of the same type. Estimates

of the Number of Record

Shareholdings

The earliest estimate of the total number of record shareholdings in the United States is apparently that of H. T. Warshow, who, in 1924, presented estimates for 1900, 1910, 1913, 1917, 1920, and 1923.4 Brief consideration of Warshow's method makes it apparent that his estimates are of numbers of shareholdings and not number of individual shareholders. * H. T. Warshow, "The Distribution of Corporate Ownership in the U.S.", Quarterly Journal of Economics, XXIX (November, 1924), 15-38. 3

20

Trends in the Distribution of Stock Ownership

However, throughout his article he used the term stockholders rather than shareholding. As we shall see, this is an important distinction. Warshow assembled data on the number of shareholdings of record and the average number of shares in each holding for specific corporations from annual reports to stockholders, replies to direct inquiries to the corporations, newspaper articles, and government documents. He chose a group of corporations "which might properly be considered representative of the corporate industries of the United States." From these data he computed for each of the years studied the average number of $100 par value shares per shareholding of record. The number of corporations covered varied, ranging from 68 in 1900 having 342,000 shareholdings of record to 281 in 1923 having 3,416,000 shareholdings of record. Using published material supplemented by estimates where necessary, Warshow computed the total par value of capital stock of all corporations in the United States for each of the years studied. Dividing these totals by the average number of $100 par value shares per shareholding of record produced the estimated number of shareholdings of record in the United States. These estimates are as follows: 1900—4.4 million; 1910—7.4 million; 1913—7.5 million; 1917—8.6 million; 1920—12.0 million; and 1923—14.4 million. The author cites two biasing elements affecting his estimates. The corporations for which shareholder of record data were available were larger than average. Believing that larger corporations tend to have smaller average size of holdings than smaller corporations, he admits that there may be an upward bias in his estimates on this account. If the magnitude of this bias remained the same during 1900-1923, it would not impair the usefulness of Warshow's data as measures of change. If the bias varies, this would not be the case. A further upward bias, most serious in 1900 and decreasing in effect throughout the period and absent in 1923, arises from the method used to estimate the total capital stock in all corporations. The method pro-

Early Efforts to Measure the Distribution of Stock Ownership

21

duced an accurate total for 1923 but probably overstated the total for earlier years, leading therefore to an overstatement of the number of holdings. This is a more serious type of bias since it acts with changing impact through the period. The growth in total shareholdings of record would be greater if this bias could be corrected. Warshow erroneously viewed the latter bias as one which "offsets" the former. Warshow combined common and preferred issues in determining both the average number of $100 par value shares held and the total par value of all capital stock outstanding. If the par value of the average common shareholding of record was larger or smaller than the par value of the average preferred shareholding of record, which it probably was, and if the proportion in which common and preferred holdings were combined in the evidence assembled by Warshow differed from the proportion for all corporations as a whole, which it probably did, his estimates may be in error. The direction and magnitude of such error, if it exists, are not measurable since we do not know the mix of common and preferred issues in his data. It seems unlikely that such an error would be very large. Berle and Means's The Modern Corporation and Private Property,5 published in 1933, was a study of the historical background of the large corporation and the legal framework within which it had grown. An important chapter of their work, Means's statistical study of the ownership of modern corporations had appeared in more detail in 1930.® The main conclusions of the analysis were given in both works, but Means's article presented the analysis in more detail. Together with several other estimates which we shall consider elsewhere, Means attempted to extend Warshow's series on total shareholdings of record through 1928 using Warshow's method without change. The resulting estimate for 1928 was 18 million 6 Adolph A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan Co., 1933). • Gardiner C. Means, "The Diffusion of Stock Ownership in the U.S.," Quarterly Journal of Economics, XLIV (August, 1930), 561-600.

22

Trends in the Distribution of Stock

Ownership

shareholdings. Means emphasized that this is "an additional figure in an index of growth, and can be construed as only the most approximate measure of book stockholders."7 This 1928 estimate is not subject to the second and more serious bias mentioned in the discussion of Warshow's work. A brief article appeared in the American Bankers Association Journal8 in 1934 citing a survey of 225 "leading corporations" made by Frazier, Jelke and Company. According to this survey "26 million names are registered as owners of American companies," referring presumably to 1934. Although no explanation was given of the method by which a survey of 225 companies provided the basis for an estimate of the total number of shareholdings of record in all American companies, it is interesting to note that the estimate that resulted coincides with that made by the Twentieth Century Fund (see below), whose method would seem to lead to a conservatively low figure. Prompted by the severe break in security prices starting in 1929 and the resulting sentiment for stricter regulation of the security markets, the Twentieth Century Fund sponsored and published in 1935 a study entitled The Security Markets.9 In this work some attention was given to the distribution of ownership of securities in the United States and changes therein during the period 1927 to 1932. To estimate the number of shareholdings of record in all companies, the authors enlisted the aid of the New York Stock Exchange. A sample of sixty-nine companies with ninety-three different stock issues was used and the number of record shareholdings in these companies totaled for each year for the period 1927 to 1932. Assuming that the growth in the number of record shareholdings of these companies was about twice that for all United States companies the authors devised an index for all companies which indicated about half the growth ' Ibid., p. 565. 8 "Stock Ownership," American Bankers Association Journal, XXVI, No. 11 (May, 1934), 74. • Alfred L. Bernheim and Margaret G. Schneider (eds.), The Security Markets (New York: Twentieth Century Fund, Inc., 1935).

Early Efforts to Measure

the Distribution

of Stock

Ownership

23

shown by the sixty-nine companies selected. This index was then used to extrapolate the series on total shareholdings of record given by Means. 10 The resulting estimates are: 1927—17 million; 1928—18 million; 1929—20 million; 1930—23 million; 1931—25 million; and 1932—26 million. The reader will have observed that all of the estimates discussed thus far, with the exception of the American Bankers Association Journal reference, for which no statistical basis is apparent, have the same statistical basis. Warshow's method of estimating the value of all stock outstanding and dividing this by the value of the average size of holding is at the heart of all the final estimates. This approach is not without its limitations, some of which have been indicated. In connection with its investigation of concentration of economic power, the Temporary National Economic Committee of the 76th Congress authorized a study of "The Distribution of Ownership in the 200 Largest Non-financial Corporations." 11 As a part of this study the total number of record shareholdings in all United States companies was estimated by a method independent of any source previously discussed. In 1937 the Securities and Exchange Commission surveyed all stock of companies with a stock registered under the Securities Exchange Act of 1934. With an appropriate adjustment for nonresponse, the issues covered by this survey represented 15.5 million shareholdings. For certain types of companies (banks, insurance companies, unregistered investment companies, and utility holding companies) not covered by the SEC survey, shareholders of record were readily available. These data indicated approximately four million additional shareholdings attributable to this group of companies. The remaining group of companies for which shareholder of record data were not readily available (mainly companies with assets under 10 million dollars) was estimated to have between three to four 10 11

Means, "The Diffusion of Stock Ownership in the U.S." TNEC Monograph 29.

24

Trends in the Distribution of Stock

Ownership

million shareholdings. This estimate was based on the relationship between shareholdings and assets for 1,148 companies derived in 192212 and an assumption regarding change in the relationship by 1937. Combining these various estimates, the authors estimated that at the end of 1937 there were between 22.3 and 25.3 million shareholders of record in United States companies. Although the authors properly call this an "estimate," over 80 per cent of the total consists of actual reported total shareholdings for specific companies, making this certainly the most reliable "estimate" for this period. Efforts to determine the number or change in the number of shareholdings in all United States corporations inevitably encounter numerous problems, the solution of which requires many assumptions and estimates of questionable reliability. On the other hand, the number of shareholdings for a specific group of companies can be determined exactly, if the list is limited to companies from which such data are readily available. For example, beginning in 1913 and continuing until 1943, the Survey of Current Business13 reported quarterly the number of common shareholders of record for American Telephone and Telegraph, Pennsylvania Railroad, and United States Steel. When the series commenced these were, respectively, the largest utility, railroad, and industrial stocks, measured by number of shareholdings. This is the longest period for which any such list is available. During this period, record shareholders for the three companies combined grew from 181,000 to 1,029,000. Warshow14 compiled lists of companies, their number of record shareholdings and number of shares for 1900,1910,1913, 1917, 1920, and 1923. The number of companies varied from forty-seven in 1917 to sixty-eight in 1900, with thirty-one companies appearing on all the lists. For these thirty-one com12

U.S. Federal Trade Commission, National Wealth and Income, 1926. " U.S. Department of Commerce, Office of Business Economics, Survey of Current Business, 1914-1943. 14 Warshow, op. cit.

Early Efforts to Measure

the Distribution

of Stock

Ownership

25

panies the list was extended to 1928 by Berle and Means, 1 5 revealing an increase from 226,000 in 1900 to 1,419,000 in 1928. The Twentieth Century Fund 1 8 reported the total number of record shareholdings for a group of sixty-nine companies annually from 1927 to 1932. The companies included in the total were not specified. During the six year period, the number of shareholdings in these companies grew from 2 million to 3.9 million. The trade magazine Printers' Ink17 reported a list of fifty companies with the number of record shareholdings for each year from 1929 to 1933, indicating an increase from 3.1 million in 1929 to 5.0 million in 1933. The New York Times18 printed a list of 206 companies and their shareholdings for each year end from 1931 to 1933, with an increase from 9.1 million to 9.7 million in the two year period. This discussion of efforts to portray growth in stock ownership as measured by number of shareholdings indicates the frequency with which the phenomenon has attracted attention and the techniques which have been used to study it. The estimates which have been made, while perhaps not accurate absolutely are probably satisfactory measures of change. As such they reveal a sustained rise from 1900 to 1932. This may but does not necessarily indicate a rise in the number of individual stockholders. If a fixed number of individual stockholders proceeded to diversify their holdings without changing the amount of money invested, the number of record shareholdings would increase with no change in the number of individual stockholders. If persons who held shares in "street names" sold to persons who held them in their own name, there would be a rise in record holdings without a rise in the number of individual stockholders. However, the estimates of changes in the number of individual stockholders discussed below suggest that there 15 Berle and Means, op. cit., appendix H. " Bernheim and Schneider, op. cit. 17 "Counting Stockholders," Printers' Ink, CLXIX (October 25,1934), 100-101. 18 Mew York Times, March 4, 1934, p. N7.

26

Trends in the Distribution of Stock Ownership

was in fact a rise in the number of such individuals following 1924, the earliest year for which an estimate is available. In short, changes in the number of record shareholdings suggest the possibility of changes in the number of individual stockholders but do not prove anything. Further investigation is necessary. Table I shows all of the available reliable estimates of the total number of shareholdings of record, including those made for years after 1940, which will be treated in Chapter III. Table 1. Estimates

of the Total Number of Shareholdings

of Record,

1900-1959

Year 1900 1910 1913 1917 1920 1923 1927 1928

Estimate (millions)

Year

Estimate (millions)

4.4« 7.4« 7.5« 8.6« 12.0« 14.4« 17.0" 18.0*

1928 1929 1930 1931 1932 1937 1952 1956 1959

18.0* 20.0* 23.04 25.0* 26.0* 22.3-25.3^ 24.4< 31.2/ 38.0*

« H. T. Warshow, "The Distribution of Corporate Ownership in the U.S.," Quarterly Journal of Economics, XXXIX (November, 1924), 15-38. b Alfred L. Bemheim and Margaret G. Schneider (eds.), The Security Markets (New York: Twentieth Century Fund, Inc., 1935). c Adolph A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan Co., 1933). d U.S. Congress, Temporary National Economic Committee, Monograph No. 29: The Distribution of Ownership in the 200 Largest Nonfinancial Corporations (76th Congress, 3rd Session, 1940). »Lewis H. Kimmell, Share Ownership in the U.S. (Washington, D.C.: The Brookings Institution, 1952). / Who Owns American Business?: 1956 Census of Shareowners (New York: New York Stock Exchange, 1956). * Shareownership in America: 1959 (New York: New York Stock Exchange, 1959).

Early Efforts to Measure the Distribution

of Stock

Ownership

27

An Estimate of the Number of Beneficial Shareholdings The number of beneficial shareholdings of a stock will exceed the number of record shareholdings because of holdings registered in brokers' or banks' names ("street names"). The first report of an effort to learn something about the number and size of holdings registered in this way was made in TNEC Monograph 29.19 Twenty-nine large companies reported to the committee the holdings of brokers and banks as a percentage of all their record holdings and the shares so held as a percentage of total shares outstanding. For nine widely held issues the average size of beneficial holdings held by brokers or banks was found to be slightly under two hundred. Taking these as approximations to the corresponding figures for all companies, the authors of the monograph concluded that the average brokers' or banks' holdings represented at the time ten beneficial holdings. For the end of 1937 they estimated total beneficial holdings in all United States corporations in the range of 24.4 million to 27.4 million, with the most probable number about 26 million, or 2 million more than the most probable estimate of record shareholdings. Estimates of the Number of Individuals Owning Stock Diversification is a time-honored principle of wise investing. Consequently, it is evident that in any estimate of total record shareholdings a large number of individual stockholders are represented by more than one shareholding, In order to surmount this problem of double counting, estimates of the number of individuals who own stock have been made, utilizing data different from that employed in estimates of total record shareholdings. As a measure of the distribution of stock ownership, an estimate of the number of people who own stock leaves much to be desired, since it tells nothing about the amount of stock these various people own. Nevertheless, it is better than the estimate " TNEC Monograph 29.

28

Trends in the Distribution of Stock

Ownership

of number of shareholdings with the duplication that that involves. The earliest attempts to find how many people owned stock were based on data in Statistics of Income20 on the number of persons reporting dividend income, supplemented with estimates of the number of stockholders not filing tax returns. J. S. McCoy, 21 a government actuary in the Treasury Department, used such data to estimate that in 1924 there were 2.4 million stock-owning individuals in the United States. Using the same method in a later article, 22 he concluded that the number had increased to 3.3 million by 1927. In 1933 Berle and Means 23 constructed an estimate for 1927 with a similar method. Showing a complete awareness of the rough nature of their approximations, they admit that the total conceivably might be as much as 7.3 million or as little as 1.8 million but feel, with good reason, that the likely limits are 4 to 6 million. For 1929, Berle and Means report the probable number of stockholders in the range between 4 and 7 million, noting, however, that this is a rough estimate, not based on the detailed method used for the 1927 estimate. The estimate of the number of stockholders made by Berle and Means for 1927 was corroborated in 1935 in the Twentieth Century Fund's The Security Markets,24 The authors used the same data sources and a slightly refined version of the methods used by Berle and Means, so it is not surprising to find their 1927 estimate of 5 to 6 million stockholders so similar to Berle and Means. The method was also applied to the data for 1928, 1929, and 1930, yielding the following results: 1928—6 to 8 million; 1929—7 to 9 million; and 1930—9 to 11 million. This is the only instance prior to 1948 in which estimates of the total " Statistics of Income, 1913-1957. ,l Joseph S. McCoy, "The U.S. Legion of Capitalists," The American Bankers Association Journal, XIX, No. 8 (February, 1927), 559-560, 626-628. " Joseph S. McCoy, "Sources of Prosperity," The American Bankers Association Journal, XX, No. 7 (January, 1930), 643-644, 702-703. " Berle and Means, op. cit., appendix K. " Bemheim and Schneider, op. cit., appendix I.

Early Efforts to Measure the Distribution

of Stock Ownership

29

number of stockholders calculated in a consistent manner are available for a series of years. The basic data for 1931 and 1932 were not available when The Security Markets was published, so estimates for these years comparable to those for 1927-1930 could not be made. However, the authors made rough approximations from their figures on annual rate of growth in number of record shareholdings in sixty-nine sample companies. Applying annual rates of growth somewhat lower than these to the estimate of stockholders for 1930, they found the number of stockholders in 1931 may have been in the range 9.5 to 11.5 million and in 1932 may have been in the range 10 to 12 million. The most detailed and thorough effort to make an estimate of this kind was made by the authors of the Temporary National Economic Committee's Monograph 29 25 for the year 1937. The most remarkable feature of this estimate is that in fact four estimates for the same year were made, each by a different method. Recognizing the biases inherent in each method, we should not expect the four estimates to coincide, and indeed they do not. However, considering them together, we get a much clearer idea of where the true value is likely to be than we would have from any one estimate alone. Moreover, with the results of the four methods at hand, we are able to infer the probable direction and magnitude of the bias in each method. The first of the four techniques employed was a greatly refined version of that first used by McCoy. The number of persons reporting dividends on Federal income tax returns was increased by the estimated number of dividend recipients not reporting and by the estimated number of persons owning only non-dividend paying stock. The result was an estimate for 1937 of 6 to 7 million stockholders. The estimated number of dividend recipients not reporting on Federal income tax returns was arrived at by dividing the amount of dividends received by individuals unaccounted for on returns reporting dividend income by an " TNEC Monograph 29.

30

Trends in the Distribution of Stock Ownership

estimate of the average dividend received by dividend recipients who did not file a return. The second method used was the same as the first except for the method of estimating the number of dividend recipients who had not filed a Federal income tax return. In the second estimate this part of the total was arrived at by extending ratios of dividend recipients to all income receivers that were known for income groups required to file a return into the income groups not required to file. It was asserted that "the very high positive correlation between net income class and the percentage of returns reporting dividends for persons filing Federal income tax returns in 1937 will permit a rough estimate to be made of the number of other individuals holding dividend paying stocks."26 The number of stockholders was estimated by this method to be between 7 and 8 million. The third estimate of total stockholders utilized the estimate of shareholdings of record previously discussed. For 1937 total shareholdings of record were estimated at approximately twentyfive million. From a sample of 5,000 Federal income tax returns the authors derived estimates of the average number of dividend paying issues owned by stockholders in various income groups. Based on these averages, the number of record shareholdings accounted for by dividend recipients who filed returns was computed and subtracted from the total record shareholdings in dividend paying issues. The difference was divided by the estimated average number of dividend paying issues held by dividend recipients who did not file returns, the resulting quotient being an estimate of the number of such dividend recipients. Finally, an adjustment was made to account for the number of stockholders owning only non-dividend paying stocks. It was estimated by this method that there were 10 million stockholders at the end of 1937. The fourth estimate was derived from a sample survey conducted for the New York Stock Exchange by Elmo Roper. The " Ibid., p. 159.

Early Efforts to Measure the Distribution of Stock Ownership

31

Roper survey indicated approximately nine million stockholders at the end of 1939. Evidence indicated there was little change in the number of stockholders between 1937 and 1939. All four methods lead to slightly different results, as we have seen. Perhaps 8 million would be the most likely singlevalued estimate, the midpoint of the range from 5 to 11 million which encompasses all the ranges indicated by the four techniques. In addition to the scholarly estimates of total stockholders discussed above, several unsubstantiated estimates appeared during the same period which might be mentioned to show the extremes to which such claims did go. In an article in Printers' Ink,21 John F. Gowen used the figure "25 million stockholders" to impress upon management the idea that stockholders represent an underdeveloped area for advertising appeal. The figure was taken from the text of testimony of Richard Whitney, then president of the New York Stock Exchange, given before the Senate Committee on Currency and Banking. As shown by the following quotation, it is not entirely clear that Whitney meant to imply that there were 25 million stockholders at any one time: "When questioned by Senator Norbeck, Mr. Whitney estimated that between 15,000,000 and 20,000,000 persons speculated in securities on the New York Stock Exchange at the peak in 1929. He estimated the number of investors at about 25,000,000 at the most." 28 Based on the findings of "a survey of 225 leading corporations by Frazier, Jelke and Company" the American Bankers Association Journal reported: "It is believed that over 10 million persons in America are holders of securities."29 This statement was followed a year later by an article in Printers' Ink by James C. deLong, which claimed that there were 15 million individual stockholders in the country in 1935. The author interprets the 17 John F. Gowen, "Fertile Advertising Field in These 25 Million Stockholders," Printers' Ink, CLIX, No. 4 (April 28, 1932), 17-20. » New York Times, April 13, 1932, p. 2. 2 * "Stock Ownership," American Bankers Association Journal.

32

Trends in the Distribution of Stock

Ownership

growth in number of individual stockholders from less than 2 million in 1920 (stated without verification) to 15 million in 1935 as a sign of "the diffusion of equities into the hands of many." He continued, "This distribution of corporate ownership and control has been a healthy development. It has nipped in the bud the growth of an economic aristocracy, the spector of which was the concern of many during the early years of the present century."30 The available evidence suggests a rise in the number of individuals owning stock between 1924 and 1932 with a subsequent decline. It has been suggested that the rise was partly due to the increased familiarity of the public with securities acquired during World War I through purchase of Liberty Bonds, customer and employee stock ownership plans, which were popular in the 1920's and, of course, the interest in stock ownership generated by the rising market of the period. The rise apparently persisted beyond the break in prices in 1929 and was not reversed until 1932. We shall see below that the number did not show signs of increase again until the decade of the 1950's. Table 2 contains all of the available reliable estimates of the total number of individual stockholders, including those for years after 1940, which will be discussed in Chapter III. Estimates

of the Distribution

of Stock

by Income

of the

Owner

A study of stock ownership cannot be very fruitful for the purposes of economic analysis if it considers only the number of stockholders or record shareholdings and pays no attention to the characteristics of these stockholders or the owners of these shareholdings. The distribution of stock, indicated by total volume of stock owned, among wealth, income, occupational, and age groups shows where control of our corporations lies James C. deLong, "Our 15,000,000 Stockholders: Who They Are, Where They Are and How They May Be Employed for Their Companies' Good," Printers' Ink, CLXXII (July 18, 1935), 21-26.

Early Efforts to Measure the Distribution of Stock Ownership

Table 2. Estimates of the Number of Individuals Owning 1924-1959

33

Stock,

Year

Estimate (millions)

Year

Estimate (millions)

1924 1927 1927 1927 1928 1929 1929 1930 1931 1932 1937 1939

2.4" 3.3* 4 . 0 - 6.0 c 5 . 0 - 6.0/ 6 . 0 - 8.(y 4 . 0 - 7.0' 7 . 0 - 9.0d 9.0—11 9.5-11.5^ 10.0-12.0rf 8 . 0 - 9.0' 9.0/

1948 1949 1949 1950 1952 1953 1954 1955 1956 1956 1957 1959

5.5* 5.3** 6.0* 4.8** 6.5*A 5.5«* 7.5«* 5.5** 8.6'* 10.0' 8.0** 12.5V*

! ;

, ! 1

" Joseph S. McCoy, "The U.S. Legion of Capitalists," American Bankers Association Journal, XIX, No. 8 (February, 1927), 559-560, 626-628. b Joseph S. McCoy, "Sources of Prosperity," American Bankers Association Journal, XX, No. 7 (January, 1930), 643-644, 702-703. c Adolph A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: Macmillan Company, 1933). d Alfred L. Bernheim and Margaret G. Schneider (eds.), The Security Markets (New York: Twentieth Century Fund, Inc., 1935). e U.S. Congress, Temporary National Economic Committee, Monograph No. 29: The Distribution of Ownership in the 200 Largest Non-financial Corporations (76th Congress, 3rd Session, 1940). f "What does the Public Know About the Stock Exchange," The Exchange, I, No. 2 (January, 1940). * U.S. Board of Governors of the Federal Reserve System, Federal Reserve Bulletin, 1949, 1950, 1951, 1954, 1956, and 1958. * Lewis H. Kimmel, Share Ownership in the U.S. (Washington, D.C.: The Brookings Institution, 1952). ' Who Owns American Business?: 1956 Census of Shareowners (New York: New York Stock Exchange, 1956). J Shareownership in America: 1959 (New York: New York Stock Exchange, 1959). * Estimate refers only to owners of publicly held issues.

34

Trends in the Distribution

of Stock

Ownership

and where the sources of present and probably future investment funds will be. There have been very few attempts made by corporations to learn about the distribution of their own stock among the various wealth, income, occupational, and age groups. Only one such study was made before 1940, that of the National Steel Company. It is described in Chapter VI. In the period presently under consideration some estimates of the distribution of ownership by income groups were made. These were of necessity based entirely on data from Federal income tax returns, as found in Statistics of Income, and related to the distribution of the stock of all corporations combined. Because of the data limitations, no estimates were made before 1948 of the distribution of stock among occupation or age groups. In Chapter V we treat the distribution of stock by income of the owner in detail, basing the analysis upon the Federal income tax return data on dividend income reported by individuals. As an introduction to the discussion, the work of other students of stock ownership who utilized these data will be described. For that reason, this work, much of it done during the period under discussion in the present chapter, will not be dealt with here. Estimates of the Distributions of Shareholdings and Shares by Size or Value of Shareholding or by Type of Shareholder No idea of the characteristics of specific shareholdings or the owners of these shareholdings can be had unless data are ob tained directly from companies' record shareholder lists. A group of over 4,000 companies supplied such information to the Federal Trade Commission for the year 1922, on the basis of which distributions of shareholdings by number and value were constructed for inclusion in National Wealth and Income.31 The companies included are those which responded to a request originally directed to a random sample of 10,000 firms chosen 51

U.S. Federal Trade Commission, National Wealth and Income.

Early Efforts to Measure the Distribution of Stock Ownership

35

from among those reporting on Federal corporate income tax forms. The representativeness of the respondents is questionable and the conclusions drawn from the replies must be considered in that light. The respondents represented 1.2 per cent of all corporations and accounted for 11.9 per cent of outstanding common stock. For the responding companies, over 92 per cent of the record shareholders were individuals, who owned 65 per cent of the common shares. Brokers in whose names 11.9 per cent of the stock was registered comprised 1.7 per cent, 3.4 percent were trustees in whose names 10.4 per cent of the stock was registered, 1.1 per cent were corporations who owned another 10.4 per cent of the stock, with the remainder owned by foreigners and nonprofit institutions. Individuals amounted to 91 per cent of the preferred shareholders of record and owned about 68 per cent of the preferred stock, while 7.2 per cent of the preferred shareholders of record were trustees, brokers, or corporations, who owned almost 29 per cent of the preferred stock. Similar information was given for twenty-two industrial groups along with the proportion of capital stock of that industry accounted for by the reporting companies in the industry. In the study for the Temporary National Economic Committee referred to below, brief reference was made to the distribution of stock by type of owner as of the end of 1937. The data were taken not from shareholder of record data but from dividend income received as shown by the Statistics of Income. It was estimated that 50 per cent of the stock of all United States corporations was owned by domestic individuals, 10 per cent by estates and trusts, 35 per cent by other corporations, and the remainder by non-profit institutions and foreigners. The large differences between these findings and those cited above for 1922 are more apparent than real. The differences in coverage and methods of estimation undoubtedly explain a sizeable, though unmeasurable, part of the total change implied. No study before or since has provided students of stock 4

36

Trends in the Distribution of Stock

Ownership

ownership with data on record shareholdings of the quality or in the quantity found in the study prepared for the Temporary National Economic Committee. The Securities and Exchange Commission prepared Monograph 29 and Monograph 30 for the TNEC on the basis of shareholder of record data obtained from all companies with a stock issue listed on an organized exchange. Monograph 30 presented two summary tabulations, one for the 1,572 common issues and one for the 645 preferred issues reported upon by the companies, representing almost 14 million record shareholdings. The degree of concentration of ownership revealed, while quite marked in itself, is an understatement of the total picture, because issues wholly owned by one corporation or individual were intentionally excluded. On the other hand, of course, distributions of record holdings by size overstate the concentration which actually prevails in beneficial holdings. The magnitude of this overstatement is discussed below. Shareholdings were shown in seven size groups and five market value groups, common and preferred issues separately, for all companies combined and by detailed industry group, asset size group, market price per share, number of record holdings, and market value of average holding. Concentration by size of holding was portrayed graphically by means of Lorenz curves for common and preferred issues separately, for all companies combined and by major industry group and asset-size group. In all cases except the communication industry, which was dominated by American Telephone and Telegraph common, the concentration of common stock was more pronounced than that of preferred. There was a general tendency for concentration to decrease as the asset size of the company increased. For all reported common issues combined, 65 per cent of the total value of shares outstanding was held in 5 per cent of the holdings. Approximately 92 per cent of the total value of shares outstanding was held in 30 per cent of the holdings, the remaining

Early Efforts to Measure the Distribution of Stock Ownership

37

70 per cent of the holdings contained the other 8 per cent of the total value. The total market value of the common stock issues included in this study, $35 billion, served as the basis for these percentages. The degree of concentration in ownership can differ a great deal from one company to another. Distributions of shareholdings by size and value for every stock issue of the 200 largest non-financial companies were reported to the committee by the Securities and Exchange Commission in Monograph 29. Within an industry, concentration, as shown on Lorenz curves, varied depending on the particular history and capital structure of the companies concerned. For example, in chemicals ownership of the common stock of du Pont was more concentrated than that of Union Carbide. In oils ownership of the common stock of Gulf was more concentrated than that of Standard Oil of Indiana. Generally the preferred issues of a company tended to be less concentrated than the common issues of the same company. Recognizing that the concentration of beneficial owneiship is not so great as the concentration of record ownership, an effort was made by the authors to evaluate the bias inherent in using record ownership instead of beneficial. For ten companies the record holdings which were made up of several beneficial holdings were identified and eliminated from the size distribution. The resulting distribution was graphed as a Lorenz curve and compared with the curve for the unadjusted distribution. The change was slight in the direction of less concentration. In fact it is possible that the true difference was overstated by the adjustment, since the eliminated holdings may have been composed of beneficial holdings on the average larger than those present in the residual distribution. The use of Lorenz curves to measure concentration of ownership of an issue is predicated on the assumption that concentration is measured by departure of the existing distribution of holdings by size from equality in size of all holdings. This is a

38

Trends in the Distribution of Stock

Ownership

realistic approach for an issue with a large number of shareholdings. For example, an issue of 1 million shares held in ten holdings of 100,000 shares each is more highly concentrated than an issue of 1 million shares held in 1,000 holdings varying in size from 10,000 shares to 10 shares, even though the fifty largest holdings may account for 30 per cent of the shares. The number of shareholdings in an issue is a measure of concentration by itself but must be supplemented with the size distribution of holdings unless the number of holdings is very small. The Lorenz curve technique was sufficient for the issues studied because in all cases the number of shareholdings was large. In addition to size and value distributions for every covered issue, the size of the twenty largest beneficial and twenty largest record holdings was reported, together with the holdings of officers and directors. There is no way to compare the degree of concentration revealed by these data with conditions as they existed before 1937, because comparable statistics have not been assembled for any earlier date. For certain companies comparable data for recent years have been obtained. These are considered in Chapter IV and compared with the 1937 data presented in this section.

Ill Recent Efforts to Measure the Distribution of Stock Ownership Introduction As

ONE

STUDIES

THE

AVAILABLE

INFORMATION

ON

THE

distribution of stock ownership, it becomes apparent that a new approach to the problem has gained acceptance in recent years. Recent studies have been based largely on information about stockholders gathered at first hand from the individuals themselves. In some studies such information has been supplemented with shareholder of record data compiled from corporate records. The use of the personal-interview technique has enriched our knowledge of stock ownership by introducing into consideration variables such as age, occupation, and wealth of the shareholder and facilitating detailed analyses using these variables. Income, which is not a new variable in studies of stock ownership, has been used in studies based upon data obtained through personal interviews. In this chapter, as in the preceding one, the discussion is organized around the various aggregates or distributions with which attempts have been made to describe the distribution of stock ownership. The estimates of each of these aggregates or distributions will be considered in turn and an attempt made to interrelate them. Within the last twelve years, a large amount of material on stock ownership has been assembled by a number of investigators. This material falls roughly into two categories. First, there are the results of large-scale, well-designed, comprehensive 39

40

Trends in the Distribution of Stock

Ownership

surveys which could have produced far more useful information than they actually did. These surveys1 were disappointing because they failed to ask certain pertinent questions and their authors failed to analyse their findings in sufficient detail. Second are the results of studies which, because of poor design, small sample size, restricted content of questions, or restricted population sampled are of limited usefulness as means of studying stock ownership as a phenomenon in the total economy. This statement is not intended as a criticism of these studies, for they may very well have accomplished their immediate purpose. In the succeeding chapters several techniques which have been or might be used to measure the distribution of ownership will be considered in detail. The potential value of these techniques has been assessed by the author through practical application. While not always entirely successful, the results of these applications are informative. Estimates of the Number of Record Shareholdings Eighteen years separate the estimate of the number of record shareholdings made by the TNEC for 1938 from the next such estimate. It will be remembered that the TNEC estimated between 22.3 and 25.3 million record shareholdings at that time. According to the New York Stock Exchange (to be abbreviated NYSE) in their 1956 Census of Shareowners,2 the total had grown to 31.2 million. The estimate reported by the TNEC covered all corporations regardless of size. The NYSE estimate, on the other hand, covered only "companies with at least one stock issue traded on one of the country's securities exchanges, or otherwise available to the general public and owned by at least 300 stockholders." 3 An attempt to increase the similarity of the coverage of these 1 Kimmel, Share Ownership in the U.S. Also Who Owns American Business? and Shareownership in America: 1959. 2 Who Owns American Business? » Ibid., p. 32.

Recent Efforts to Measure the Distribution of Stock Ownership

41

estimates can be made by adjusting the TNEC figure downward by the number of record shareholdings estimated for a group of companies "which constitute the bulk of the number of unregistered corporations, [and] are for the most part relatively small non-financial companies." 4 A group of companies so described might be very similar in number of record shareholdings to the group of companies having less than 300 stockholders. In 1938 the estimated number of record shareholdings for this group lay between 3 and 6 million. Deleting this part from the estimate of record shareholdings in all companies leads to an estimate of approximately nineteen million record shareholdings in other companies. The first comprehensive study of shareownership done under the sponsorship of the NYSE was carried out by the Brookings Institution for the year 1952.5 However, an estimate of total record shareholdings was made only for 2,991 companies, reporting on 3,954 separate issues, and came to 20.3 million. Subsequent adjustments were made in this total to arrive at an estimate of 25.2 million for the number of beneficial holdings in these issues. These adjustments will be considered below. The adjusted figure was then augmented by estimates of beneficial holdings in all other publicly owned issues to arrive at an estimate of 30.3 million beneficial holdings. The 3,954 issues specifically covered by the Brookings survey accounted for about 83 per cent of total beneficial holdings thus computed. There seems to be no evidence available on differences among widely held and closely held companies in ratios of beneficial holdings to total record shareholdings, so we shall assume that these 20.3 million record shareholdings were 83 per cent of the total record shareholdings in all publicly owned companies. Thus we are led to an estimate of 24.4 million record shareholdings in such companies. The definition of "publicly owned company" used by Brookings is any company with a stock issue traded on 1 6

TNEC Monograph 29, p. 173. Kimmel, op. cit.

42

Trends in the Distribution of Stock

Ownership

an organized security exchange or over-the-counter.8 Assuming that very closely held issues were excluded from such a definition, it would lead to a smaller number of record shareholdings than the broad concept of the TNEC study, which, although not stated as such, apparently represented complete coverage of all corporations. On the other hand, the 1952 Census definition of a publicly owned corporation seems broader than the 1956 definition because of the condition in the latter that an issue be owned by at least 300 shareholders of record to be considered publicly owned. The difference is probably not great because of the relatively small number of shareholders of record in these closely held companies. In the 1959 Census of Shareowners the New York Stock Exchange reported a total of 38 million record shareholdings in publicly owned corporations. There appears to have been an increase in the number of record shareholdings in publicly owned corporations from 19 million in 1933 to 24 million in 1952, 31 million in 1956, and 38 million in 1959. This represents an increase of 100 per cent in twenty-one years, with 70 per cent occurring in the last seven years. Comparison with changes in the estimated number of individuals owning stock, which cannot be made before 1952, shows that between 1952 and 1956 record shareholdings increased 28 per cent and stockholding individuals 33 per cent. Between 1956 and 1959 record shareholdings rose 21 per cent and stockholding individuals, 45 per cent. Differences in the rates of change in these two measures of shareownership may arise from two sources: changes in the mean number of issues held per shareholding individual; and changes in the propensity of individuals to hold their shares in "street names." Material presented later in this chapter suggests that little or no change occurred in the latter between 1952 and 1959. No independent estimates of changes in the mean number of issues per stockholding individual are available. From the available estimates of numbers of stockholders and numbers of • Ibid., p. 124.

Recent Efforts to Measure

the Distribution

of Stock

Ownership

43

shareholdings of record, it appears that the mean rose from 4.17 to 4.258 between 1952 and 1956 and fell to 3.5» by 1959. By way of comparison it is interesting to note that the mean in 1937 was estimated to be something under 3.10 Evidence on issues per owner indicates a highly skewed distribution, with perhaps half of all individual stockholders owning only one issue and a small number owning very large numbers. 11 The latter tend to be those who own very large amounts of stock, and such individuals are in very high income groups. 12 An attempt to provide a measure of growth in number of record shareholdings bridging the gap between the depression years of the 1930's and the postwar period of increased activity in the market was provided by the New York Times in 1950.13 For fifty selected companies, all large and listed on the NYSE, the number of record shareholdings is shown for 1930 and 1949. The total record shareholdings for the fifty companies grew 63 per cent in this period, from 2.8 million to 4.4 million. The growth indicated by a selected group of companies such as this is quite likely to be greater than the growth in all companies. These are the large companies which survived the depression and attracted investors with this demonstration of their strength. The companies which faltered or failed were not likely to be included in such a list. The 63 per cent growth should be taken as a maximum figure for all companies during this period with the correct value probably lying below this. An Estimate of the Number of Beneficial Shareholdings As we have previously observed, the number of shareholders of record for any company falls short of the true number of 7

Ibid., p. n o . Who Owns American Business? ' Shareownership in America: 1959. 10 TNEC Monograph 29, pp. 165 and 181. 11 Kimmel, op. cit., p. 110. 18 TNEC Monograph 29, p. 181. See also Federal Reserve Bulletin, (October, 1949). 15 New York Times, May 28, 1950. 8

44

Trends in the Distribution of Stock Ownership

beneficial owners of the stock because of shares held in brokers' or banks' names (nominees). The number of beneficial holdings so registered is difficult to ascertain even for one issue and obviously far more difficult for all issues. In TNEC Monograph 29 14 it was estimated that the most probable number of beneficial holdings in 1938 was 26 million, compared to 24 million record holdings, an 8.5 per cent difference. In the 1952 Brookings study 15 a serious effort was made to learn about the beneficial holdings represented by broker and nominee holdings. For nominee holdings of twenty selected common stocks, 132 banks reported on the number and size of beneficial holdings included in their nominees' holdings of record and the type of beneficial owner (e.g., man, woman, joint, fiduciary, institution, etc.). As one might expect, there was substantial variability among issues in the average size of beneficial holding and the number of such holdings per nominee holding. No data on the average size of all beneficial holdings in any one or all of these issues were shown, so it is impossible to compare these two different categories of beneficial holding as to size. For the twenty issues combined, the average number of beneficial holdings represented by one nominee holding was approximately twenty. In order to learn more about beneficial holdings included in brokers' holdings of record, Kimmel obtained reports on the same twenty common stocks from 434 brokers on the number and size of beneficial holdings included in their holdings of record and the type of beneficial owners. For the twenty issues combined the average number of beneficial holdings represented by one broker's holding was approximately thirty. Using the information gathered through these samples of banks and brokers, Kimmel constructed an estimate of the number of beneficial holdings in the 3,954 issues covered by his study. The estimate of beneficial holdings came to 25.2 million, compared with 20.3 million holdings of record in the same 14 11

TNEC Monograph 29. Kimmel, op. cit.

Recent Efforts to Measure the Distribution

of Stock Ownership

45

issues. These estimates cover both common and preferred issues. The results of the sample of twenty common issues were used with appropriate adjustments where necessary to compute estimates for the preferred issues. Several different methods of estimation were used in order to extend this total for the 3,954 issues actually studied to all publicly owned issues. For the latter group of issues a total of 30.3 million beneficial holdings was estimated. As previously noted, the difference in scope between the estimates of the TNEC study and Kimmel's work, while difficult to quantify, appears small. With this qualification then, we may observe that Kimmel's estimate of 30.3 million beneficial shareholdings in 1952 exceeds the TNEC estimate of 26 million for 1938 by 16.5 per ccnt. Comparison of this percentage with the 28.4 per cent increase in number of record shareholdings during the same period suggests that the tendency for beneficial holdings to be held in "street names" diminished during the period. Estimates of the Number of Individuals Owning Stock Prior to 1948 all estimates of the number of individuals owning stock, with one exception, were based upon Statistics of Income data together with supplementary estimates. The exception to these was an estimate based upon results of a personal interview survey conducted by Elmo Roper for the NYSE at the end of 1939. In 1948 and the years following, eight separate estimates have been made, each based upon an independent personal interview survey, and none has been made from Statistics of Income data. Commencing in 1946 and continuing annually the University of Michigan has conducted a Survey of Consumer Finances designed to show the current financial condition of consumers and their plans for spending or saving during the ensuing year. The survey encompasses a random sample of about three thousand different families each year. Certain questions are asked regularly each year while others are asked

46

Trends in the Distribution of Stock Ownership

less frequently. In this way it has been possible to question respondents about a number of aspects of stock ownership. Questions about ownership of stock in publicly held corporations have been included frequently with the result that an internally consistent series of estimates of the number of individuals owning stock is available from 1948 to 1957. These estimates are subject to a sampling error which according to the authors is almost surely less than twenty per cent. The following are the estimated number of individuals owning stock in publicly held corporations: 1948—5.5 million; 1949—5.3 million; 1950— 5.0 million; 1953—5.5 million; 1955—5.5 million; and 1957— 8.0 million. In the language of the survey, publicly held corporations are those "open to public investment." These estimates are less than estimates of the number of persons owning stock in any corporation, public or otherwise, by the number of persons owning stock only in other than public corporations. This group is in all probability very small. A person owning stock in a private corporation is likely also to own some in one or more public corporations. Nevertheless, the authors caution that the estimates should be taken as minima because of other limitations, such as incorrect responses about stock ownership by members of the family other than the respondent and the exclusion by the survey of certain elements within the adult population. Comparison of these estimates with others for the same period and for earlier years will be deferred until all the others have been introduced. As part of the Brookings study previously mentioned, a field survey of 5,000 representative families was carried out early in 1952. The 5,000 families included 15,552 persons. Based on the results of this well-designed study, it was estimated that 6,490,000 persons owned stock in publicly owned corporations at that time. It was estimated that 6,350,000 of these persons were adults, so that approximately one in every sixteen adults was a stockholder. This distinction is one of some interest and one which apparently had not been made in any previous study.

Recent Efforts to Measure the Distribution of Stock Ownership

47

The growth or decline in number of persons owning stock should be measured in terms of the changes in the adult population, which does not necessarily change in the same way as the total population. The stockholders encountered in this study were classified by several social and economic characteristics. We shall have reason to examine the findings below. The 1956 Census of Shareowners of the New York Stock Exchange combined analyses of shareholder of record data and survey data just as the 1952 Brookings study did. In early 1956 four thousand adults selected at random were interviewed to determine age, occupation, education, income, and shareownership status. Approximately one in twelve was found to be a shareowner, implying that there were 10 million shareowners in the nation in early 1956. Of these, 8,630,000 persons owned some stock in publicly held companies and 1,400,000 owned only stock in privately held companies. As we have noted before, the definition of publicly owned corporation used in 1956 seems somewhat more restrictive than that used in the 1952 Brookings study. There seems no way available to assess the magnitude and adjust for the difference in definitions, but it is clear that doing so would enlarge the change which occurred between 1952 and 1956. As it is, an increase in stockholders in public corporations from 6,490,000 to 8,630,000 is indicated, a 33 per cent rise in four years. An estimate made by the NYSE using an undisclosed method indicated 7,500,000 stockholders at the end of 1954. According to these figures there was a 15 per cent rise between early 1952 and late 1954 and a 15 per cent rise between late 1954 and early 1956. The 1959 Census of Shareowners reported 12.5 million stockholders early in 1959. There has been a 45 per cent rise in the number of persons holding stock in publicly owned corporations between 1956 and 1959. From the preceding chapter, we see that the total number of stockholders increased from something under 3 million to perhaps 10 million during the 1920's and declined to 8 million during the 1930's. From the present chapter, we see that the decline

48

Trends in the Distribution of Stock Ownership

may have persisted into the late 1940's, when the total number of stockholders was not much above 6 million, following which there has been a steady rise to 12 million stockholders in 1959. There has been almost a 50 per cent increase in the adult population between 1930 and 1959. Although estimates of the number of persons owning stock for years prior to 1947 are subject to rather wide margins of error, even the more conservative suggest that sometime about 1930 one out of eight adults owned stock. In 1959 one out of eight adults owned stock. Shareownership appears to be no more widespread in 1960 than it was in 1930. Clearly, it is necessary in discussing the diffusion of ownership, if one measures this in terms of persons owning stock, to relate changes in number of stockholders to changes in the adult population. However, the diffusion of ownership is not adequately portrayed even by changes in the relative incidence of stock ownership. The key question remains: what is the distribution of shares, not shareownership, among economic and social groups? Estimates of the Distribution of Stock by Income of the Owner The Surveys of Consumer Finances regularly ask the total money income before taxes for each spending unit. In 1949, 1950, 1952,1955, and 1957, the amount of stock held in publicly owned corporations was also ascertained from each spending unit. As a result, for each of these years there is available a percentage distribution of the spending units in each of five or more income classes among six or more amount-of-stock-held classes. Unfortunately, these distributions suffer from several limitations. Most serious is the fact that the largest income class, which is open-ended, of course contains over one-third of the stock owning spending units. For an accurate picture these spending units should be grouped into additional higher-income classes. The extreme skewness in the distribution of stock among income classes, as shown by all studies, makes this doubly

Recent Efforts to Measure the Distribution of Stock Ownership

49

serious. The largest amount-of-stock held class is also open-ended with a relatively small lower limit. About one-fourth of the stockholding spending units are in this class, and their importance to the question at issue dictates that they be shown in more detail. Finally, there is the problem of sampling error. Treating the stockholding spending units as a sample of all stockholding spending units in the country and attempting to generalize to the universe from the sample are subject to rather large errors. The number of stockholding spending units found by the survey has generally been about three hundred. If a table with sufficient detail for analysis is constructed, the cell frequencies are such a small percentage of the total that possible percentage sampling errors loom large. The authors of the survey have recognized that their findings in this area are not very reliable. In the technical appendix to the 1958 survey they state: "Clearly the survey is not a reliable source of information for aggregate holdings of corporate stock or for holdings by various groups. The findings are more reliable on the proportion of spending units owning stock and the distribution of units by size of holding below a reasonable upper limit." 18 We shall return to the findings of these surveys with respect to other characteristics of stock ownership in succeeding sections. In 1953 Effects of Taxation: Investment by Individuals by Butters, Thompson, and Bollinger was published." This was one volume in a series concerned with the effects of taxation upon various aspects of economic behavior. As an important source of information for their work the authors instigated a survey of 746 known investors, which they refer to as the "active investor" sample. These were persons who had active accounts with brokerage firms throughout the nation and, as a result, probably should not be thought of as a random selec" Federal Reserve Bulletin (September, 1958), p. 1050. 17 J. Keith Butters, Lawrence E. Thompson, and Lynn L. Bollinger, Effects of Taxation: Investment by Individuals (Boston: Division of Research, Graduate School of Business Administration, Harvard University, 1953).

50

Trends in the Distribution of Stock

Ownership

tion of stockholders in general. It is, however, a particularly interesting group because of the large number of persons in upper income and wealth categories, those reached so infrequently by sampling the population at large. The authors found occasion to develop estimates of the distribution of stock between the under $10,000 and over $10,000 income classes and used data from the active investor sample and the Survey of Consumer Finances to do so. For 1949 it was estimated that 70 per cent of the marketable stock held by individuals was held by spending units with incomes of $10,000 and above, with 52 per cent owned by spending units in this income class, which owned $100,000 or more of marketable stock.18 Marketable stock as used here corresponds to "stock in publicly owned corporations" as used by the Survey of Consumer Finances. The table referred to in the footnote shows the distribution of the marketable stock owned by spending units in the under $10,000 and the $10,000-and-over income classes among six amount-of-stock-owned classes. To investigate the distribution among income groups of the 70 per cent of marketable stock held by spending units with incomes above $10,000 Butters et al. turned to the Statistics of Income for 1948 and 1949 for the distribution of dividend income by income group. Accepting these distributions of dividend income for individuals as imperfect but best available indications of the distribution of stock owned by the spending units of which they were members, the authors derived the following results: those with incomes above $50,000 own 33 per cent, those with incomes between $25,000 and $49,999 own 16 per cent, and those with incomes between $10,000 and $24,999 own 21 per cent of the marketable stock owned by spending units. Based upon the Survey of Consumer Finances estimate of 5.3 million stockholders in 1949 (probably low) and the 1949 Statistics of Income distribution of dividend recipients by income, it was estimated that dividend recipients with incomes of $50,000 or " Ibid., Table XVU-6, p. 433.

Recent Efforts to Measure the Distribution of Stock Ownership

51

over per year constitute less than 1 per cent of all stockholders, those with incomes between $25,000 and $49,999 about 2.5 per cent, and those with incomes between $10,000 and $24,999 about 8.5 per cent. Thus, it appears that in 1949 about 0.7 per cent of all stockholders owned one-third of all stock. These findings depend heavily upon the accuracy of the data in the Survey of Consumer Finances. They show a higher degree of concentration than that implied by the Statistics of Income data which we have analysed and discussed in Chapter V below. Changes in the concentration of ownership by income group are emphasized there since only the Statistics of Income affords sufficient information for a long-term analysis. As measures of the degree of concentration at a specific point in time both probably err, Butters et al. in overstating and ours in understating. Estimates of the Distribution of Shareholdings and Shares by Size or Value of Shareholding or by Type of Shareholder Only two agencies have ever undertaken the enormous task of assembling data on the shareholdings of record of all companies with issues of stock listed on an organized exchange. The Federal government did so for 1938, publishing the results in Monographs 29 and 30 for the TNEC. The findings of that study have been reviewed in the previous chapter. Since that time three surveys have been carried out for the New York Stock Exchange, in 1952, in 1956, and in 1959. Each included many issues in addition to those listed on the organized exchanges. The 1956 and 1959 surveys were even more inclusive than that of 1952. Table 3 presents the results of these three surveys with respect to the distribution of shareholdings of record and the shares in these shareholdings by type of record shareholder. Separate tabulations are given for common issues and preferred issues. Also included in the table are similar figures for 1922 from the Federal Trade Commission's report, National Wealth and 8

Trends in the Distribution of Stock Ownership

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held in brokers' names is also greater among common issues than among preferreds, yet the reverse is true of the proportion held in nominees' names. These relationships suggest that perhaps the beneficial ownership of shares held in brokers' names is more heavily concentrated among individuals than the beneficial ownership of shares head in nominees' names. As noted above, data on the beneficial ownership of stock held in brokers' and nominees' names are meagre. Kimmel made an effort to obtain information on this matter, reporting the results in Share Ownership in the U.S.* For twenty selected common issues, a group of 132 banks reported the beneficial ownership of the holdings in these issues registered in the names of their nominees. Fiduciaries accounted for half of the shares and institutional investors an additional 13 per cent. Individuals owned about 20 per cent. Holdings in the name of brokers were analysed with the help of 434 brokers, who supplied information on the beneficial ownership of their holdings in twenty selected common issues. Individuals accounted for 82 per cent of the shares in these holdings. In 1951, shortly before publication of the study by Kimmel, Armco Steel Corporation made a study of the beneficial ownership of common shares held in brokers' names. This study revealed that individuals owned 60 per cent and brokers 33 per cent, with the remainder thinly spread among other types of beneficial owners. The beneficial holdings by brokers were in the firms' own account. In 1956 the Consolidated Natural Gas Company made a special study of the beneficial ownership of common shares held of record by nominees and found the distribution as follows: individuals, 9.4 per cent; estates and trusts, 43.5 per cent; non-profit institutions and foundations, 16.1 per cent; pension and retirement trusts, 15.6 per cent; investment trusts, 8.4 per cent; corporations, 6.3 per cent; and insurance companies, 2.5 per cent. The results of these surveys confirm strikingly the impression 4

Kimmel, Share Ownership in the U.S., pp. 52 and 59.

80

Trends in the Distribution

of Stock

Ownership

gained initially by an examination of Tables 12 and 13. Speaking entirely in terms of beneficial ownership, individuals tend to own greater proportions of common issues than of preferred issues. Institutional investors own greater proportions of preferred issues. Thus, brokers' holdings of record, which were shown in the Armco study to be composed largely of individuals' or brokers' beneficial holdings, are larger proportionally in common issues than in preferred issues. Nominees' holdings of record, shown in the Consolidated Natural Gas study to be composed largely of fiduciaries' or institutions' beneficial holdings, are larger proportionally in preferred issues than in common issues. Although the companies represented by the issues covered in Tables 12 and 13 were not presented as a representative sample of United States corporations, comparisons can be made to gauge the similarity of the unweighted means at the bottom of these tables to the corresponding figures for all publicly held issues of United States corporations. These comparisons were made with the findings reported in the 1956 Census of Shareowners.1 The largest discrepancies appear in the percentage of shares held by nominees in both preferred and common issues. The percentages for all publicly held issues are about half as large as those for the issues covered by our data. There is also a large difference in the percentage of preferred shares owned by individuals, the figure for the restricted group being about fourtenths of that for all publicly held issues. Since the companies represented in our data are larger and more widely held companies, one might be tempted to say that the per cent of shares held by nominees is higher in issues of companies of this type. A special supplement to the 1956 Census of Shareowners6 indicates how size of issue, as measured by number of record stockholders for issues on the New York Stock Exchange, is related to per cent of shares held by each type of record stock• Who Owns American Business? pp. 25 and 27. " Ibid., Special Supplement.

Revealed by Shareholder of Record Data for Large Companies

81

holder. The per cent of common shares held by nominees rises with increases in number of record stockholders to 20.6 for issues having 50 to 100,000 record stockholders, then drops sharply to 13.9 for issues with over 100,000. Among preferred issues both the percentage of shares held by individuals and the percentage held by nominees reach a maximum in the issues with the largest number of record shareholders. The companies from which data were obtained are among the largest listed issues. The very high figures for nominee holdings among them are in line with the findings just noted from the supplement. The percentages shown in Tables 12 and 13 for brokers are smaller than the corresponding figures for all issues on the New York Stock Exchange. However, the special supplement previously cited shows clearly that for common and preferred issues both, the per cent of shares held by brokers is least for those issues having the largest numbers of record shareholders. Thus again we find that the averages calculated for the small group of companies in Tables 12 and 13 are in agreement with the reports from the New York Stock Exchange. In the special supplement, variations in the percentage of shares held by different categories of record shareholders are shown in relation to size of issue as measured by number of record shareholders and, for the broker, nominee and institution categories, in relation to size of issue as measured by number of shares outstanding. Other variables might also be employed to see what further relationships exist. This has been done for the common issue represented in Tables 10 and 12. A similar analysis for preferred issues was not done because of the small number of issues for which information is available. This could be done by the agency to whom the data on a larger group of issues are available. Does the nature of the product of the issuing corporation have any bearing upon the distribution of an issue by type of record shareholder? Table 14 shows the unweighted arithmetic mean per cent of shares held by each type of holder for allissues

Trends in the Distribution of Stock Ownership

82

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92

Trends in the Distribution of Stock Ownership

1952 are based on a maximum of twenty-three companies. All issues studied are common stocks. The percentage of shares held by men declined in almost every issue from 1947 to 1957. Between 1952 and 1957 the only increases were shown by two tobacco stocks, 15 per cent in one case and 27 per cent in the other. The declines averaged about 10 per cent (i.e., the percentage of shares held by men in 1957 was 90 per cent of the percentage of shares held by men in 1952). The declines from 1947 averaged about 20 per cent. The percentage of shares held by women generally declined slightly from 1952 to 1957, after remaining steady between 1947 and 1952. There were of course exceptions to these generalizations, as there will be to most general statements in this summary. From 1952 to 1957 the percentage of shares held by women rose as much as 8 per cent and fell as much as 14. The most striking change in ownership by type of holder during the period in question is the shift of shares into joint holdings. All six issues for which data for 1947 and 1957 are available show increases ranging from 58 to 251 per cent in the percentage of shares held jointly. Only three of twenty issues show a decline between 1952 and 1957 with the increases averaging about one-third. Individuals' holdings, the composite of men's, women's, and joint, contained on the average a slightly smaller percentage of shares in 1957 than in 1952, but the changes were very small. In onlyfiveissues out of twenty-three was the change larger than 10 per cent in either direction. Seven issues for which data for 1947 and 1957 were available showed on the average no change at all. No issue showed more than a 10 per cent change either way. In two-thirds of the issues the percentage of shares held by fiduciaries declined between 1952 and 1957, and the increases which occurred were in general small. In six of seven issues there was also a decline from 1947 to 1952. The decline from 1947 to 1957 averaged 23 per cent, from 1952 to 1957, 9 per cent.

Revealed by Shareholder of Record Data for Large Companies

93

Changes between 1952 and 1957 in the percentage of shares held by brokers were very dissimilar, ranging from an increase of 52 per cent to a decrease of 52 per cent. On the average there was no change. Between 1952 and 1957 the percentage of shares held by nominees rose an average of 22 per cent. Only four issues showed declines, none as much as 10 per cent. Changes in the percentage of shares held by non-profit institutions were irregular, declines occurring in two-thirds of the seventeen issues covered. Limited evidence indicates that the percentage of shares held by insurance companies tended to rise through the period in question. The data under consideration do not contain sufficient evidence for any generalizations about changes in ownership by other financial institutions. Summarizing these findings, we may say for the period between 1947 and 1957 that the percentage of shares held by men and women declined, particularly for men, while the percentage held jointly rose commensurately so that individuals' holdings contained an only slightly smaller percentage of shares in 1957 than in 1947. The same may be said for the 1952 to 1957 period. Fiduciaries' holdings declined relatively through the entire period. Nominees' holdings as a percentage of shares rose during the 1952 to 1957 period for most issues, while brokers' holdings showed no general movement in either direction despite a number of changes in individual issues. In a similar fashion the holdings of non-profit institutions showed no consistent pattern of change between 1952 and 1957, although in numerous issues large changes occurred. Concurrent with changes in the percentage distribution of shares by type of record holder were changes in the distribution by size of holding. In this connection we are fortunate to have data for comparative purposes from a pre-war year, 1937. The Temporary National Economic Committee, in Monograph 29, published distributions of record holdings and shares in seven size groups for each equity issue for the 200 largest companies. Using these distributions together with the data received from

94

Trends in the Distribution of Stock Ownership

co-operating companies, there are nine issues for which a comparison among the years 1937,1947, and 1957 is possible and an additional fourteen for which a comparison between 1937 and 1957 is possible. For these issues and years, the percentage of shares held in the largest 5, 20, and 50 per cent of record holdings have been computed. We shall discuss only the changes in the percentage of shares held in the largest 20 per cent of record holdings because with one exception, which will be mentioned later, changes in this figure follow the same pattern as changes in the others. Among the nine issues available in 1937, 1947, and 1957 the lowest percentage of shares in the largest 20 per cent of record holdings in all years was that of the American Telephone and Telegraph Company which declined from 73.6 in 1937 to 67.8 in 1947 and 66.6 in 1957. The highest percentage in 1937 was 99.2 for Philadelphia Electric, but this fell to 78.8 in 1947 and 75.1 in 1957. In these later years Shell Oil was high with 96.4 in 1947 and 96.2 in 1957. For these companies the average percentage (unweighted arithmetic mean) declined from 86.0 in 1937 to 79.8 in 1947 and 78.2 in 1957. From 1937 to 1947 every issue covered showed a decline. From 1947 to 1957 six of nine showed a decline, and from 1937 to 1957 seven of nine showed a decline. When the group of companies is enlarged to include those for which data from 1937 and 1957 only are available, the only effect is to reduce the averages slightly to 84.3 for 1937 and 76.3 for 1957. The high and low values are not changed. In the fourteen issues added to the original group there is only one for which the percentage of shares held in the largest 20 per cent of record holdings rose between 1937 and 1957. There are only three such issues out of the twenty-three studied. All three companies asked that their names not be revealed. Only one other company in the twenty-three made this request. There is a single exception to the generalization that the changes in thefigurefor the largest 20 per cent of record holdings

Revealed by Shareholder of Record Data for Large Companies

95

are typical of the changes in the other values computed. For the nine companies for which such a comparison is possible, the average percentage of shares held in the largest 50 per cent of record holdings increased between 1947 and 1957. Six of the nine issues showed an increase over the ten year period. By way of summary one can say that the size distributions of record holdings in common stock issues with large numbers of record holders clearly showed a tendency to become less concentrated between 1937 and 1947. There appears to have been little if any déconcentration between 1947 and 1957. For the twenty year period the average percentage of shares in the largest 1 per cent of record holdings declined from 69.2 to 59.0, the percentage in the largest 5 per cent from 84.3 to 76.3, and the percentage in the largest 20 per cent from 95.2 to 92.5. One factor which influenced the decline in these averages was the distribution of the shares in several public utilities which were controlled in 1937 by holding companies later forced to dissolve. The distribution of the shares in the operating companies by the holding companies sharply reduced the concentration in the ownership of these issues. Five companies of the twenty-three studied were affected by such a distribution. The averages were calculated with these five companies omitted. For the largest 5 per cent of record holdings the decline between 1937 and 1957 in percentage of shares included was 6.7 percentage points, compared with 10.2 percentage points for all twenty-three companies. For the largest 20 per cent of record holdings the decline was 5.9 compared with 8.0 and for the largest 50 per cent, 2.1 compared with 2.7. These distributions of shares in the operating companies might be said to have accounted for roughly one-fourth of the diffusion in the size distribution of record holdings over this twenty year period. The pros and cons of stock splits have been widely discussed but the evidence on the actual effects of stock splits is quite limited. Most of the arguments have been based on the effects which are thought to follow splits. The article by Barker pre-

96

Trends in the Distribution of Stock 8

Ownership

viously cited demonstrates that a split is in fact followed by an increase in the number of record stockholders larger than that for non-split issues for similar firms. The increase in the number of beneficial holders may well be greater since some new beneficial holdings may become part of a broker's or nominee's holding which existed before the split. If sufficient data on the distribution of shares and shareholdings by type of holder and size of holding were available for issues in which splits have occurred, revealing analyses of the effects of stock splits might be carried out. For best results these distributions would have to be available at monthly intervals for at least a year before and after the split occurred. Data covering the months prior to the split would be very important. It may well be that the changes in the number of stockholders and the size distributions of holdings following a stock split are not the result of the split but merely a continuation of changes which were developing before the split. A split frequently takes place after a stock has attracted attention and performed well pricewise. Thus certain characteristics of the stock bring about wider distribution and conditions favorable for a stock split simultaneously. To attribute the continued growth in ownership to the split may be an error. Unfortunately, the data supplied by firms in answer to direct inquiry afforded only three such illustrations. In fourteen additional cases, data by type of holder or by size of holding, but not both, are available. From this very limited body of evidence only the most tentative conclusions can be drawn. The following remarks are based upon this evidence and presented more as hypotheses suggested than as general rules demonstrated. Following a split, individuals as a percentage of all record holders increase and the percentage of shares held by individuals increases. If either of these percentages has been changing prior to the split, the subsequent change is larger if positive or smaller if negative. Relative to shares outstanding the average in• Barker, op. cit.

Revealed by Shareholder of Record Data for Large Companies

97

dividual's holding tends to be smaller after the split than before and to get relatively smaller as time progresses. In most cases the average holding of each type of record holder declines in the same manner following a split. This phenomenon has been present to a degree in many issues within the last decade but the change appears more pronounced in issues where a split has occurred. There seems to be little doubt that a split is accompanied by wider distribution of ownership in one sense. More people own some stock after than before the split. Furthermore, the average size of all holdings is smaller after a split than before, allowing for the adjustment in the averages necessitated by the split. Closer study of the nine cases where size distributions of record holdings before and after the split are available shows that splits tend to be accompanied by an increased concentration in the size distribution. Table 21 shows the median change in the percentage of shares held in the largest 1, 5, 10, 30, 50 and Table 21. Effects

of Stock Splits on the Size Distribution Stockholdings of Record

of

Median change in the percentage of shares in the indicated percentage of holdings cumulated from the largest holding Change during year prior to year Per cent in which of holdings split occurred 1 • 510305075-

+.05 +.35 +.50 +.35 +.05 .00

Change during year in which split occurred

Change during year following year in which split occurred

+.20 +.50 +.50 +.50 +.30 +.50

.00 +.30 +.10 +.35 +.25 .00

98

Trends in the Distribution of Stock Ownership

75 per cent of record holdings during the year prior to the year in which a split occurred, the year the split occurred, and the year following. These medians are based on between six and nine cases depending on the availability of data. The median change during the year in which the split occurred is larger than the median change in the preceding or following year at all points in the size distribution, with one exception where the median change in the preceding year was the same as the median change during the year in which the split occurred. Apparently the increase in the number of holdings accompanying a split represents many new small holdings. This change brings down the average size of holdings and increases the concentration of shares in the large record holdings. These are hypotheses suggested by the available data which could be more thoroughly tested if a larger body of evidence could be assembled. It is not clear that a split would be accompanied by the same changes in the size distribution of beneficial holdings, although there is no evidence that it would not. The changes among beneficial holdings might not be relatively as large as those among record holdings but they would probably be in the same direction. In other words the average size of beneficial holdings would decline while the concentration in the size distribution of beneficial holdings rose. These are also hypotheses which could be tested if appropriate data were available.

V The Distribution of Stock Ownership as Revealed by Dividend Income Reported on Federal Income Tax Returns A s A BY-PRODUCT OF THE OPERATION OF THE FEDERAL INCOME TAX

laws there is available a large body of statistical data compiled from the tax returns filed by individuals, corporations, fiduciaries, and other legal entities as required by the law. Each year these data are published by the Treasury Department in several volumes, collectively referred to as the Statistics of Income. The earliest year for which information is available is 1913. Since then volumes have appeared annually, the coverage varying slightly from year to year but generally increasing in scope and detail. Starting with 1916 the data covering individual returns have shown income reported according to source. Except for 1944 and 1945, when dividends and interest were reported together, the amount of dividend income shown on all the returns in each of a number of income-size classes has been tabulated. Additional detail on dividend income has frequently been published. The purpose of this chapter is to explore ways in which these data can be used in measuring changes in the distribution of stock ownership. We must recognize that while receipt of dividend income implies ownership of stock by the recipient (or by a trust under which he is a beneficiary), ownership of stock does not necessarily imply receipt of dividend income. It is true, as critics have observed, 1 that if the distribution of non-dividend paying stocks 1

Butters, Thompson, and Bollinger, Effects of Taxation: Investment Individuals, p. 436. 99

by

100

Trends in the Distribution of Stock Ownership

by income of the owner is different from that of dividend paying stocks, the distribution of dividend income receipts does not accurately reflect the distribution of stock ownership. It is argued 2 that the tax laws provide an incentive to individuals in high tax brackets to hold non-dividend paying stocks which, it is assumed, will lead to capital gains, taxable at a lower rate, rather than dividend income, taxable at the full rate. Butters et al. do not show any quantitative evidence on this specific point but their interviews with investors did produce a number of replies showing that investors in high tax brackets often care less about dividends than about capital gains because of the differences in taxation. The reader cannot know how often this attitude led such investors to select stocks paying no dividend at all. Furthermore, inferences about the distribution of stock ownership based on the distribution of dividend income assume that ra uniform capitalization rate can correctly be applied to dividend income at each income level. Evidence on the adequacy of this assumption was presented by Atkinson 3 and derives from Wisconsin state income tax returns of individuals for 1949. Atkinson's Table 30, shown below as Table 22, gives the average yield on shares held by persons in each of five income groups. "Untraded issues" are those for which price and dividend quotations were not available in the published investment manuals. The yields in Table 22 are actually weighted means of the yields on the many different issues held by persons in these income groups. If we wished, we could construct for each income group a weighted mean of the four yields shown, using as weights the proportions of traded common, untraded common, traded preferred, and untraded preferred held by the persons in the income group. It is in fact this mean which we assume equal for all income groups when we 'Ibid. * Thomas R. Atkinson, The Pattern of Financial Asset Ownership (Princeton: Princeton University Press, 1956).

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