A Trophy Owner Also Familiar With Turmoil

Jeff Bezos’s purchase of The Washington Post raises the possibility that he acquired the paper as a trophy to celebrate his success as the founder and chief executive of Amazon.com. The acquisition comes after the purchase of The Boston Globe by John W. Henry, the owner of the Boston Red Sox and a trading firm billionaire. The purchases are part of a broader trend toward private ownership of media companies.

A classic economic study by Harold Demsetz and Kenneth Lehn finds that concentrated ownership might be explained by the “amenity potential” of certain companies, including mass media and sports teams. John Henry’s holdings nicely illustrate both. As the authors explain, winning the World Series or “believing that one is systematically influencing public opinion” may provide consumption benefits to the owners even if profits are diminished.

The study raises another possibility, however. Concentrated ownership works better in highly volatile environments, where rapid change and external forces make it difficult for public shareholders to monitor and judge the performance of managers. In such “high agency cost” environments, it may be more efficient for a single owner or a dominant shareholder to keep an eye on how managers are dealing with rapid change and disruptive innovation. “The noisier a firm’s environment, the greater the payoff to owners in maintaining tighter control,” the paper explains. “Hence, noisier environments should give rise to more concentrated ownership structures.”

Mr. Bezos has proven highly talented at managing in disruptive, innovative environments. While Amazon is a publicly traded company, Mr. Bezos remains the dominant shareholder, consistent with what the Demsetz and Lehn study predicts. Perhaps the right to control The Washington Post is worth more when Mr. Bezos owns the company. Not because it’s a trophy, or to save the world, but simply because an experienced and talented captain gets to steer the boat through the rough seas ahead.

The Demsetz and Lehn study, published in the Journal of Political Economy (1985), is available here.

Victor Fleischer is a professor of law at the University of San Diego, where he teaches classes on corporate tax, tax policy, and venture capital and serves as the director of research for the Graduate Tax Program. His research focuses on how tax affects the structuring of venture capital, private equity, and corporate transactions. Twitter: @vicfleischer