Alfred D. Chandler, Jr., observed that under managerial capitalism, salaried managers tended to pursue policies that promoted the long-term stability and growth of their enterprises. The U.S. cable television industry provides a case study of how managers responded when stability and growth were mutually consistent objectives, and when they were mutually exclusive. From the late 1950s through the early 1980s, agent-led newspaper publishers and television broadcasters invested aggressively in the cable business. Beginning in the mid-1980s, however, investing in cable implied a tradeoff between stability and growth objectives. As a wave of mergers swept the cable industry, agent-led companies avoided acquisitions that might dilute earnings and depress stock prices. Confronting an increasingly turbulent competitive environment during the first half of the 1990s, agent-led companies were much more likely to divest cable assets than owner-managed firms. In agent-led companies, managers believed that their cable units would require massive capital investments, and they were reluctant to "bet the company" on a business facing so much competitive, technological, and regulatory uncertainty. Owner-managers, emotionally attached to the cable industry and to the firms they had built, and often harboring dynastic ambitions, were more reluctant to sell: they were willing to gamble on growth.
Joseph Schumpeter would have loved the U.S. cable television business: twice in its short history, the industry has been the instrument of creative destruction. First, cable programming services took considerable audience share from television broadcasting stations. By 1995, in the 64 percent of U.S. households that subscribed to cable services, cable programming had captured 46 percent of total television viewing hours; the balance went to local broadcasters.  Second, cable TV companies had begun offering local telephone service during the early l990s, challenging incumbents that had monopolized that market for one hundred years. The task required the deployment of leading-edge technologies, and had provoked retaliatory entry by phone companies into cable companies' lucrative video entertainment business.
Very different types of organizations unleashed this Schumpeterian gale. The first U.S. cable systems were built in the late 1940s by entrepreneurs. By the 1960s, however, these owner-managed firms that were focused exclusively on cable shared control of the industry with companies that had diversified into cable from the newspaper and television broadcasting businesses. Like the entrepreneurial startups, many of these diversified media companies were run by owner-managers--often second or third generation members of the founder's family. In other cases, the founding family had yielded control to professional managers. In these agent-led diversified media companies, family trusts sometimes remained the dominant shareholders. Usually, however, the trusts' equity had been sold or diluted, resulting in dispersed ownership. Thus, in the U.S. cable television business, we see the coexistence of three of the organizational types in Alfred D. Chandler, Jr.'s, taxonomy: entrepreneurial capitalism, family capitalism, and managerial capitalism. 
Through its history, the cable industry has been extremely capital intensive: its managers regularly have confronted decisions regarding large, irreversible investments with long payback horizons. Confidence regarding prospective returns on these investments has varied over time. At points, cable companies have faced high levels of uncertainty regarding customer demand, technology, competition, and regulation; at other times, uncertainty over such factors has ebbed. This paper examines the influence of two aspects of organizational form on firms' responses to changing levels of risk in the cable industry: the firms' degree of diversification and their governance arrangements, specifically, the extent of their CEOs' equity ownership. Theorists have presented conflicting arguments regarding the impact of governance on risk taking behavior, but past empirical work generally has indicated that management equity ownership and risk taking co-vary positively.  Likewise, theorists have disputed the impact of diversification on strategic risk taking behavior. Only two empirical studies have previously explored this question; both found a negative relationship between diversification and risk taking. 
The research presented in this paper on the influence of organizational form on risk taking behavior is broadly consistent with past empirical findings. In brief, following a decline in uncertainty about returns on cable industry investments during the second half of the 1970s, agent-led diversified companies expanded their collective share of cable industry customers. However, following a sharp increase in uncertainty about technology, regulation, and competition during the first half of the 1990s, agent-led diversified companies were likely to divest cable assets; in aggregate, they lost considerable market share to owner-managed firms focused exclusively on cable. Thus, Chandler's observation that entrepreneurial capitalism tends to give way to managerial capitalism has not yet been validated in the U.S. cable television business. The industry's recent history has seen managerial capitalism in eclipse.
The Television of Abundance: 1948--1969 
John Walson launched the first commercial cable television system in Mahanoy City Pennsylvania, an Appalachian town eighty-six miles from Philadelphia.  Walson worked as a lineman for Pennsylvania Power & Light and also owned a local appliance store, which held an inventory of unsold TV sets. To demonstrate the sets, he secured informal permission from his employer to string an electrical wire from a local hilltop to serve as an antenna for the reception of signals from Philadelphia stations. When customers who purchased TV sets asked to be connected to Walson's antenna, he recognized a business opportunity. Walson charged two dollars a month for this service, and by the middle of 1948 had 727 customers. He and other entrepreneurs soon began setting up similar "Community Antenna Television" systems in rural areas where television reception was poor. By 1955, there were about 400 such systems with a total of 150,000 subscribers. Thus, cable TV was born of necessity very shortly after the mass market for television broadcasting began to grow. 
The first CATV systems carried only three channels, which matched or exceeded the number of TV stations locally available in the rural areas where cable got started. By the end of the 1950s, however, cable technology had improved to the point where 12-channel systems were commonplace.  Cable entrepreneurs used these additional channels along with microwave relay systems to import broadcast signals from distant markets. By expanding program choice in this manner, cable operators were able to increase prices and attract more customers. Cable entrepreneurs also saw an opportunity to create "cable-only" channels by acquiring programming rights from movie studios and sports franchises. Cable operators then could charge customers a premium for access to these "pay TV" channels, above the monthly subscription charge for what came to be known as the "basic tier" of broadcast channels.
The first forays into pay TV were vigorously opposed by movie theater owners and by advertising-supported television broadcasters. Movie studios, afraid of alienating theater owners and broadcasters, their largest customers, generally were unwilling to provide pay TV operators with programming. The Federal Communications Commission (FCC), concerned that pay TV would divert viewers and thereby undermine ad-supported broadcasting stations, promulgated a series of regulations that retarded the growth of pay TV. As a result, early efforts to develop pay TV were unsuccessful. 
The FCC'S opposition to pay TV was consistent with a broad reversal of its policy toward cable television that began during the late l950s. Through most of that decade, the Commission had adopted a laissezfaire stance toward cable, on the grounds that it lacked jurisdiction over the industry, and that, in any case, extending the reach of broadcast signals served the public interest.  By the late 1950s, however, it was impossible for the FCC to ignore the enmity that cable TV was generating from broadcasters. TV station owners asserted that cable operators' importation of distant signals reduced their audiences. Stations whose signals were imported complained that cable operators profited from their programming without paying for it. The FCC, committed to developing a robust local broadcasting industry, first intervened to restrict a cable operator's actions in the Carter Mountain case of 1959, when it denied the Riverton, Wyoming cable company permission to import distant broadcasters' signals.  After the Carter Mountain decision survived court challenges, the FCC formalized its policies concerning the importation of broadcast signals. In 1966, the Commission required cable operators operating in the 100 largest television markets (where 87 percent of the U.S. population then lived) to obtain formal permission--which almost never was granted--before importing distant signals. 
The FCC'S restrictions may have slowed cable's expansion into urban markets, but the overall rate of growth for the industry actually accelerated during the late 1960s. The total number of homes subscribing to cable grew at a compound annual rate of 30 percent between 1966 and 1970, and reached 4.5 million at the end of that period (Exhibit 1). By contrast, the compound annual growth rate in subscribers for the 1961 to 1965 period was 15 percent, and for 1955 to 1960 was 21 percent. Cable's rapid growth during the late 1960s was spurred by high profits. Typical cable systems outside the top 100 markets earned rates of return on net investment. (before taxes and interest expense) over 40 percent. 
Wired Cities: 1970-1975 
With industry growth surging through the 1960s, cable began to draw attention from policy makers and academics who looked beyond its economic impact on the broadcasting business, and saw a potentially revolutionary communications medium. These policy makers and academics were influenced by the ideas of Marshall McLuhan and by a Zeitgeist concerned with social change.  In their view, with its abundant channel capacity, cable could become the savior of American television, which had become a "vast wasteland" in the hands of greedy capitalists.  In "wired cities," citizens could produce their own programming and distribute it on channels that cable operators would provide to municipalities free of charge, as a condition of franchise approval. "Narrowcasting" would supplement broadcasting with an array of arts and educational programming. Jeffersonian democracy would bloom as cable subscribers used "two-way," interactive cable technology to cast votes in public referenda. 
By the early 1970s, with organizations like the RAND Corporation, the Brookings Institution, and the Sloan Commission all calling for more supportive regulation of cable, pressure for change was building.  The Nixon Administration, beleaguered by the broadcast networks, encouraged cable's growth, under the theory that "the enemy of my enemy is my friend." FCC Chairman Nicholas Johnson, an ardent supporter of the wired cities concept, championed a series of FCC actions helpful to the cable industry.  For example, the Commission sought to rescind its restrictions on the carriage of distant signals into the top 100 markets. After much debate, in 1972 the FCC issued standards for the number of broadcast station signals that should be available in a community. Cable operators were allowed to import distant signals up to the point where the standards were met. In 1972, the FCC also limited the franchise fees that municipalities could charge cable operators to three percent of revenue, and fixed the length of franchise agreements at fifteen years, reducing uncertainty for cable operators when bidding for new franchises or renegotiating the renewal of existing franchises. 
With new rules in place improving their access to programming and capping franchise fees, cable operators rushed to develop urban markets. They encountered a chaotic and sometimes corrupt process as they negotiated for franchises.  In addition to the aggressive demands of city officials, cable operators encountered higher than expected construction costs as they entered urban markets. It proved difficult to lay cable under busy city streets while avoiding disruption to existing power, phone, water and sewer lines.  Penetration also developed more slowly than expected, because city dwellers tended to have access to more over-the-air broadcast signals than subscribers in rural areas; reception of these over-the-air signals usually was good; and the urban population was more transient, which implied higher subscriber attrition rates and thus increased marketing and field service expenses.
With low penetration and high capital and operating expenses, cable operators experienced significant losses in most urban systems. Hence, in 1975, the industry was not very profitable. Based on financial data for seven public companies predominantly engaged in operating cable systems, the sample companies' weighted average pretax income was only 3.1 percent of revenues.  This low profit margin reflected the interest expense associated with an average debt-to-equity ratio for the sample companies in excess of 2-to-1. The two largest cable companies, TelePrompTer and TCI, nearly went bankrupt during the early 1970s due to excessive debt leverage. 
The cash drain from building and operating cable franchises encouraged industry consolidation. Despite the fact that over three thousand separate franchises had been awarded by cities and towns across the United States, by 1975, the 50 largest multiple systems operators (MSOs) served 72 percent of the industry's total subscribers (Exhibit 2).  Of the 7.1 million subscribers in systems operated by the top 50 MSOs, 25.7 percent were customers of seventeen owner-managed focused firms; 24.3 percent were customers of seventeen owner-managed diversified companies; 11.5 percent were customers of three agent-led focused firms; and 38.5 percent were customers of thirteen agent-led diversified companies (Exhibit 3). 
Through the 1970s, both owner-managed and agent-led focused firms typically were still run by their founders.  However, in the case of the agent-led focused firms, the entrepreneurs' ownership stakes had been diluted by issuing new equity to fund expansion. Owner-managed focused firms also financed their growth by issuing additional stock, but in many of these firms the founder preserved control of a majority of shareholder votes by creating a separate class of equity with superior voting rights. Also, in owner-managed focused firms, the founders frequently avoided dilution of their ownership stake by relying more heavily on debt to fund expansion than their counterparts in agent-led focused firms.
In 1975, thirty of the fifty largest MSOs were subsidiaries of diversified companies. Seventeen of these thirty diversified companies were led by owner-managers--usually the firm's founder, but sometimes a second- or third-generation family member, as with Cox Communications and the Providence Journal. Most of the thirteen agent-led diversified firms had widely dispersed equity ownership; however, in a few companies, like Times Mirror and King Broadcasting, members of firms' founding families owned the majority of shares. Among these thirty MSOs owed by diversified corporations, eight, including Cox, Times Mirror, and Newhouse, had corporate parents that owned both newspapers and broadcasting properties. Another thirteen were owned by parents that owned TV and/or radio stations, but no newspapers. This group included many smaller companies, like Gill Industries, which owned a TV station in San Jose, along with giants like General Electric, Westinghouse, and General Tire. 
Expanding into cable TV--either by applying for franchises or by acquiring established cable companies--was a natural strategy for broadcasters and newspaper companies for three reasons.  First, in securing cable franchises, media company managers could leverage their knowledge of local communities and their political processes. However, some companies avoided franchising: their executives worried that the need to influence city officials might put the company's reputation at risk. Second, managers in many diversified media companies viewed entry into cable as a hedge: they believed that their newspaper readership and broadcasting audiences might decline over time due to competition with cable, and wanted to reduce their dependence on advertising revenues, which fluctuated with …