Abstract

Scholars engage in extensive debate about the role of families and corporations in economic growth. Some propose that personal ties provide a mechanism for overcoming such transactions costs as asymmetrical information, while others regard familial connections as inefficient with the potential for corruption and exploitation of minority shareholders. This empirical study is based on a unique panel data set of shareholders that have been matched with the manuscript U.S. population censuses, to provide information on age, occupations and wealth of individuals and households. Related investing was widespread among both elite and small shareholders, and seems to have been pervasive throughout the firm and the corporate economy, during the critical period of early industrialization. Such connections were especially evident among ordinary investors in emerging industries and in the newer, more risky investments. “Outsider investors” were able to overcome a lack of experience and information by taking advantage of their own networks. The link between related investing and the concentration of ownership in the corporations suggests that this phenomenon was likely associated with a reduction in transactions costs and perceptions of risk, especially beneficial for capital mobilization in manufacturing and transportation. These patterns are consistent with a more productive interpretation of related investing and its function in newly developing societies.