Ownership Structure and Corporate Performance

Transcription

1 Europäische Hochschulschriften / European University Studies / Publications Universitaires Européennes 3442 Ownership Structure and Corporate Performance Bearbeitet von Katinka Wölfer 1. Auflage Buch. XXIV, 321 S. Softcover ISBN Format (B x L): 14,8 x 21 cm Gewicht: 450 g Wirtschaft > Corporate Responsibility Zu Inhaltsverzeichnis schnell und portofrei erhältlich bei Die Online-Fachbuchhandlung beck-shop.de ist spezialisiert auf Fachbücher, insbesondere Recht, Steuern und Wirtschaft. Im Sortiment finden Sie alle Medien (Bücher, Zeitschriften, CDs, ebooks, etc.) aller Verlage. Ergänzt wird das Programm durch Services wie Neuerscheinungsdienst oder Zusammenstellungen von Büchern zu Sonderpreisen. Der Shop führt mehr als 8 Millionen Produkte.

2

3 Introduction 1 1 Introduction 1.1 Motivation and Objectives The term ownership conceptually refers to two formal rights: the right to control the firm and the right to claim the firm s residual earnings (Hansmann, 1988). Formal control does not necessarily mean effective control as formal control generally involves only the right to elect the firm s supervisory board and to vote directly on a few fundamental matters, such as, for example, amendments to the statutes, dividend payouts, or a merger or dissolution of the firm. If shareholders are too numerous and too dispersed, it might not be possible to exercise even these limited control rights meaningfully, with the result that managers possess substantial autonomy. This raises the concern that managers might use their power to pursue own interests, oblivious to the welfare of the owners. Berle and Means (1932) investigated the issue of separating ownership from control and provided an early statement of the principal-agent problem: Those who control a corporation can serve their own pockets better by profiting at the expense of the company than by making profits for it (p. 122). Since Jensen and Meckling (1976) picked up the debate and developed a formal concept of the principal-agent conflict between shareholders and managers, a whole branch of research has evolved investigating the issue of separating control from ownership and its resulting impact on corporate performance. Various arguments have been put forward supporting the notion that the structure of ownership will have significant implications for the performance of the firm. For example, it has been suggested that concentrated ownership may contribute to the solution of agency conflicts in large companies because large shareholders have an interest in value maximization and also possess enough voting control to put pressure on the management and have their interests respected (Shleifer & Vishny, 1997). However, there may be costs of large investors as well. The fundamental problem is that large investors represent their own interests, which need not coincide with the interests of other investors (and other stakeholders) in the firm. As a consequence, large investors might be incentivized to secure private benefits and thereby redistribute wealth from others (Barclay & Holderness, 1989). Yet another view on the relation between ownership and performance is raised by Demsetz (1983) who argues that ownership is an endogenous variable and that ownership structure has no equilibrium effect because this would imply that profit-seeking owners could gain by rearranging their portfolio.

4 2 Introduction Based on theoretical considerations, it is uncertain as to whether large shareholders contribute to the solution of agency problems, exacerbate them or even have no effect at all. A wealth of empirical research has been conducted, but evidence is mixed and does not provide unambiguous results. Most studies use single equation regression models to explore the relation between ownership concentration and performance and find a positive (e.g., Thomsen & Pedersen, 2000) or insignificant effect (e.g., Hill & Snell, 1988; Holderness & Sheehan, 1988; Pedersen & Thomsen, 1999), although some studies identify a negative effect (e.g., Konijn, Kräussl, & Lucas, 2001). More recent contributions accept the view voiced by Demsetz (1983) that ownership is an endogenous variable and that this needs to be taken into account when estimating its effect on performance. These studies apply simultaneous equation models and mainly find the effects of ownership structure to be insignificant (e.g., Demsetz & Lehn, 1985; Demsetz & Villalonga, 2001; Weiss & Hilger, 2012). However, most studies that use data from the German market provide evidence of a positive effect of ownership concentration on performance even when addressing endogeneity of ownership (e.g., Edwards & Weichenrieder, 2004; Gugler & Weigand, 2003), although some studies find contradicting evidence of a negative effect (e.g., Lehman & Weigand, 2000). As the ongoing debate on ownership concentration and performance has, so far, largely produced inconclusive results, the question remains whether concentrated ownership does significantly affect performance. While most research treats large owners as a homogenous group with a singular interest on maximizing shareholder value, a complimentary area of investigation suggests that the identity of large owners is an equally important but often neglected dimension of ownership structure with important implications for corporate performance. Accordingly, it has been argued that the commitment of owners and their willingness to engage in monitoring activities or alternatively to exploit private benefits may crucially depend on their identity (e.g., Thomsen & Pedersen, 2000). This suggests that simply examining ownership structure in terms of the distribution of shares does not provide a full account of the story. A great deal of research has been carried out, which focuses on the effect on performance of ownership in the hands of insiders (e.g., Hermalin & Weisbach, 1991; McConnell & Servaes, 1990; Morck, Shleifer, & Vishny, 1988), financial investors (e.g., Bushee, 1998; Brickley, Lease, & Smith, 1988; Chung, Firth, & Kim, 2002), commercial banks (e.g., Cable, 1985; Gorton & Schmid, 2000; Morck, Nakamura, & Shivdasani, 2000) or the government (e.g., Atkinson & Halvorsen, 1986; Megginson, Nash, & van Randenborgh, 1994; Meyer, 1975), whereas little

5 Introduction 3 attention has been devoted to the impact of ownership held by nonfinancial corporations or private investors. To the best of knowledge, only five empirical studies have sought to incorporate the entirety of owner identity groups into the empirical investigation of the effect of ownership structure on performance (Edwards & Nibler, 2000; Edwards & Weichenrieder, 2004; Lehmann & Weigand, 2000; Pedersen & Thomsen, 2003, and Thomsen & Pedersen, 2000). This is largely due to the extraordinary data requirements concerning the size and identity of all shareholder parties in a firm. Another reason is that research mainly relies on U.S. or U.K. evidence, which is partly due to legal restrictions characterized by the dominance of institutional and insider shareholders, whereas there is considerable variation in owner identity in Continental Europe where ownership is typically also concentrated in the hands of families, nonfinancial corporations, banks or the government (Fohlin, 2005). As a consequence, still little is known about the impact of the various groups of large shareholders on corporate performance. For this reason, the empirical analyses in this dissertation classify shareholders as individuals, insiders, corporations, financial investors, commercial banks and government entities. The investigation of a broad basis of shareholder identities fills a gap in literature and aims to contribute to a more thorough understanding of the relation between ownership structure and corporate performance. Another contribution to the literature on ownership and performance is the estimation of nonlinear effects of ownership concentration using restricted cubic splines. Most previous empirical studies estimate linear relations, with only few studies also modeling quadratic, cubic or piecewise-linear model shapes. However, when underlying mechanisms are not known, cubic spline functions offer a much better way to model nonlinear relations because they can assume virtually any shape and hence provide greater flexibility for fitting data. As a result, cubic splines are much less likely to be biased than quadratics or other polynominals, or (piecewise-) linear regressions. To the best of knowledge, this approach is a novelty in the field of ownership and performance and has not been applied before. A further improvement of the quality of findings stems from the construction of a panel data set, which captures not only variation across companies but also variation over time. In contrast to many studies that focus only on a certain number of large firms, the data set used in this dissertation consists of almost all companies listed at the Frankfurt Stock Exchange and hence reflects the overall German equity market. Furthermore, data are collected for the five consecutive years and hence cover all major phases of an economic cycle. This should

6 4 Introduction lead to an improvement of data quality compared with many studies that are based on a snapshot of only one or few observation years. Due to the large number of 2,118 observations (489 corporations), the data set is rich in content and should therefore produce an increased precision in estimation. Lastly, another advantage of the data sample is the use of German data. As emphasized, existing empirical evidence mainly refers to the US or UK. However, ownership structures in Anglo-American countries are much more dispersed than in Continental Europe, which is characterized by a higher ownership concentration (Organisation for Economic Co-operation and Development, 2014). As a consequence, studies based on data collected in the US or UK might yield good results for firms with low levels of ownership concentration but are less suitable for analyses of concentrated firms because they cannot provide a large enough sample of those firms. German firms hence appear to be a promising research object, making the results also applicable to other Continental European countries. Combining the improved conceptual approach of investigating both ownership concentration and identity with the advanced methodological design and the advantageous data sample sheds new light on the relation between ownership structure and performance. The empirical results indicate that ownership concentration has a generally positive effect on capital market performance. However, the effect is nonlinear with a negative effect at low levels of ownership concentration, a positive but bell-shaped effect at medium levels, and again a positive effect at high levels of ownership concentration. Moreover, the analyses reveal that the identity of large owners matters for this relation. That is, the positive performance effect at medium to high levels of ownership concentration is driven by the relative dominance of large financial institutions and intercorporate owners who are documented to have a positive impact on corporate performance. In contrast, the negative performance effect at low levels of ownership concentration is attributed to the value-decreasing impact of small ownership in the hands of insiders (in particular managers), individual investors and government agencies. The effect of bank ownership is insignificant. A major conclusion to arise from this dissertation is therefore that the relation between ownership concentration and corporate performance can be explained to a large degree by the distinction between various owner identities that have different implications for firm performance and, at the same time, diverge in their preferences for ownership in particular size brackets. This implies that ownership concentration effects should rather be interpreted as owner identity effects.

7 Introduction Outline This dissertation consists of seven parts: Chapter 1 explains the motivation and objectives of the research and outlines the structure of the work. Chapter 2 introduces the subject and examines the characteristics of ownership and performance. This will form the basis for the selection of variables for the empirical analyses. First, the chapter elaborates on the construct of ownership concentration and presents the universe of possible measures and their usage in the relevant literature. Second, the various types of owners and their relevance in the German context as well as means of measurement are examined. Finally, measures of corporate performance are explained and compared. The third chapter builds the theoretical framework of the relation between ownership and performance. As the discussion is mainly grounded in the fundamental conflict between managers and owners, the chapter first elaborates on agency theory, its consequences and the role of ownership structure as a mechanism to overcome shareholder-management conflicts. The chapter then concentrates on the concepts of ownership concentration and owner identity and develops hypotheses regarding the link between ownership and performance. Existing literature is reviewed in Chapter 4. The major conclusion is that simply examining ownership in terms of the percentage of shares owned by the largest shareholder does not provide a full account of the story. Instead, there is a need to incorporate the identity of owner groups into the analysis, assuming that various motivations and abilities of different types of shareholders may result in their distinctive effectiveness to influence corporate value. The literature review is summarized in a table of more than 60 papers in Appendix A.1. Chapter 5 develops the research design for the subsequent empirical analyses by describing the data, outlining the model and introducing the econometric approach. The sixth chapter presents the empirical analyses. First, the chapter examines the effects of ownership concentration. Second, the impact of owner identity is investigated. Finally, the two effects are conflated to a combined model in order to capture the effect of ownership concentration as a function of the identity of owners. The chapter closes with a summary and discussion of results. Finally, Chapter 7 concludes the dissertation, derives implications for public policy and corporate decision makers, and gives an outlook on future research directions.