Ultimate ownership and firm performance across Europe: Does identity matter?

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Master Thesis for International Business and Management

Ultimate ownership and firm performance across Europe:

Does identity matter?

By

Wilco Dwarswaard

Supervisor: Dr. A. Visscher

University of Groningen

Faculty of Economic and Business

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___________________________________________________________________________ Abstract: This study investigates whether or not there are differences in performance, measured in total return, between four groups of companies with a different ultimate owner identity and a group of companies that are widely held. The four ultimate ownership identities that were researched are: family ownership, state ownership, ownership by a financial institution and ownership by a non-financial institution. For 60 European companies, data on total return has been collected for the period may 1998 to may 2007. With help of an analysis of variance (ANOVA) test, no significant differences in firm performance have been discovered between the four groups of companies with an ultimate owner and the sample companies that are widely held, based on the data collected for this period of time. Future research on this topic may include different measurements for firm performance, include more variables, focus on industries and focus on different parts of the world.

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A lot has been written on the possible influence of corporate ownership structures on firm performance. The discussion on this topic even dates back to the early 1930’s. In that decade, Berle and Means (1932) made their study public which emphasized a positive relationship between a concentrated ownership structure within a firm and the performance of that firm. The ample studies that investigate the influence of ownership structures on firm performance, often find contrasting results. For example, a study from Burkhart, Gromb and Panunzi (1997) found that an increasing level of ownership concentration has an increasing positive effect on corporate firm performance, because more control makes it more easy to make performance maximizing decisions. On the other hand, a study of Shleifer and Vishny (1997) found a negative relationship between ownership concentration and corporate firm performance because of the increasing incentive to behave opportunistically. Also, there are studies that say that there is no systematic relationship between ownership concentration and corporate firm performance (Demsetz and Villalonga, 2001). Although these studies do absolutely enrich our understanding of why for example a centralized ownership structure would be related to corporate firm performance in a positive way, or why it would in contrast influence the performance of a firm in a negative way, it does not thoroughly analyze the effect of the various different shareholders and stakeholders in a centralized ownership structure. Often, these studies only focus on the broad concept “centralized ownership structure”, where there is at least one party that controls 20% (or 10%) of the shares, and decentralized forms of ownership, where no such large shareholders exists, and we say that this firm is ‘widely held’ (La Porta, Lopez-de-Silanes and Shleifer, 1999) Also, most these previous studies focus on companies located either in the United States (US) or in the United Kingdom (UK) (e.g. Demsetz (1983) and (Demsetz and Villalonga, 2001).

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that an ultimate shareholder can have influence the performance of European firms compared to those firms that are widely held?’’ In order to answer this question, two sub-research questions are formulated: (1) “what motives do the various identities have to ultimately own a European firm” and (2) “what are the main objectives that the various identities want to pursue by ultimately owning a European firm?”.

As said before, there are ample studies on the influence of ownership structure on corporate firm performance (e.g. Short (1994), Demsetz (1983) and Thomson and Pedersen (2000)). These studies often present contrasting results; some of them did found a relationship between centralized ownership structure and corporate firm performance (e.g. Shleifer and Vishny (1997), and some did not (e.g. Holderness, 2001).

This article is structured in the following way. In the next section, the available literature on relationships between centralized ownership structure and corporate firm performance will be thoroughly reviewed. This part will consist of three sub-sections. The first sub-section will review the stream of literature that did not find a relationship between ownership concentration and corporate firm performance. The second sub-section will review the literature from the previous decades that found a positive relationship between a centralized ownership structure and corporate performance. To conclude section one, sub-section three will review some literature that found a negative relationship between a centralized ownership structure and corporate firm performance. Section two will consist of four sub-sections. In these sub-sections, the four identities that an ultimate shareholder can have will be explored: state, family/individual, widely held corporation and widely held financial. For each identity, their motives to ultimately own a firm and the objective they pursue with ultimately owning a particular firm will be explained. Together with these explanations, hypotheses will be drawn up at the end of each sub-sections. In section three, I give a detailed overview of the methodology used in this article and how and why the data that is used to empirically answer the research question is collected. Section four will contain the results of the tests, and will discuss in detail whether or not there is a (significant) effect of the various identities on corporate firm performance of European firms. Section five will provide the reader with a discussion and limitations of the research. To conclude, section six will give a brief summary, sums up the conclusions and deals with managerial implications following the results of this study.

1 Literature review

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results that suggest a positive relationship, results that suggest a negative relationships, and also studies that resulted in the conclusion that there was no relationship between centralized ownership and corporate firm performance . In this section, an overview will be provided of some of the studies that resulted in these contrasting results. First, a study will be reviewed that resulted in not finding any systematic relationships between centralized ownership structures and corporate firm performance. Second, studies that found a positive relationship between centralized ownership structures and corporate firm performance will be reviewed and to conclude studies that provide proof for a negative relationship between centralized ownership structures and corporate firm performance will be discussed. To start with, it is important to briefly explain what is meant with ownership concentration (or the level of centralized ownership) in this article. With ownership concentration is meant to what extent a firm is controlled by a single party. Important here is what percentage of the shares of a firm the party holds. In short, the greater percentage of the shares of a firm is owned by just one party, the greater the level of ownership concentration within a firm. This will be explained in more detail later in this article.

1.1 No relationship between concentrated ownership structures and corporate firm performance.

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profit for a firm, Demsetz and Lehn argued different. They argue that the decision of applying various ownership structures to a firm are always made in full awareness of their consequences for the rate of control over the professional management of the firm. A change in costs or profit resulting from different ownership structures would be offset by changes in capital acquisition costs and/or other profit-enhancing aspects of various ownership structures. Therefore, there should be no relationship between ownership concentration and corporate firm performance (Demsetz and Lehn, 1985).

1.2 Positive relation between concentrated ownership structures and corporate firm performance

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concentrated ownership as a means to provide previous knowledge of doing business to managers in order to increase their capabilities (Carney, 2001). Also, in an economic weak period, the often abundant resources of large shareholders could help a firm to overcome weak performance during that period (Yoshikawa and Phan, 2005). To summarize, a large shareholder should be able to increase corporate firm performance, when this party has the incentive to use their ownership rights, for making decisions that result in better corporate performance. Also, the fact that concentrated ownership in underdeveloped countries can substitute for effective governance systems should increase corporate firm performance by means of coercing managers to work in the best interest of the shareholders. Finally, previous experience to enhance managerial capabilities and abundant resources to overcome weak performance in economic crisis are other forms in which concentrated ownership can result in a positive way to corporate firm performance.

Section 1.3 Negative relationship between centralized ownership structures and corporate firm performance

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performance. Firm performance can decrease when an ownership structure results in different interests of parties owning large percentages of shares and small shareholders and firm performance can decrease when the ownership structure of a firm provide the large shareholders with incentives to behave opportunistically.

2 Exploring Identities of Ultimate Shareholders

In the previous section, literature has been reviewed that did not find proof for a relationship between centralized ownership structures and corporate firm performance and literature has been reviewed that did find proof for either a positive or a negative relationship between centralized ownership structures and corporate firm performance. In this section, literature on the various identities of an ultimate shareholders and their possible positive and/or negative effects on corporate firm performance will be reviewed. Problems, advantages and disadvantages of the various centralized ownership structures will be discussed as thorough as possible. Before this reviewing, there will be briefly explained what is meant in this article with an ultimate shareholder. Then, the identities of ultimate shareholders will be reviewed in the following order: sub-section 2.2 reviews the relationship between family ownership and corporate firm performance, section 2.3 deals with the state as ultimate shareholder and sub-section 2.4 reviews various institutions as ultimate shareholders and their possible effects on firm performance.

2.1 The Ultimate Shareholder

In the previous sections, the term “ultimate shareholder” has been used quit often? But what is an ultimate shareholder actually? When can we say that a shareholder is ultimate? In this article, the definition of La Porta, Lopez de Silanes and Shleifer (2007) will be followed, who mention that a shareholder is ultimate when the shareholder has an amount of share in the firm that exceed 20 percent. This is a threshold often used in the literature stream dealing with ownership. The reason for using this threshold is that 20 percent of the share is often enough to have effective control over a firm (La Porta et al., 2007).

2.2 Family ownership and corporate firm performance

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agency costs (e.g. Dyer, 2006). To summarize, families owning and controlling business can influence firm performance in both positive and negative ways. The most important factor to expect a positive effect of family ownership on firm performance is the idea that a family member involved in the company is loyal to the family name, and they will behave in a trustworthy way. This will increase efficiency of the firm and therefore performance. Also, longevity goals of a family company moderates between family ownership and firm performance. On the other hand, the fact that firms owned by families can be risk averse can be a disadvantage for the firm’s performance, because they are not willing to take on debt, fearing to lose control over their company. Also, conflicts within the family can decrease family members their loyalty and trustworthy behavior towards the firm, and will misalign interest which eventually decrease a firm´s performance. Because family owned firms are more risk averse and often want to stay fully able to self finance their business (Fama and Jensen, 1985), and therefore are likely to miss out on investments which may increase their financial results (Loderer and Martin, 1997), this may imply constraints on firm performance. With this in mind and with regard to most of the previous scholars finding agency problems decreasing firm performance within family businesses outside Europe, a negative effect of family ownership on firm performance within European firms is expected. Therefore, the following is hypothesized:

H1: Within European firms, family ownership has a negative effect on firm performance compared to

the performance of widely held companies.

Section 2.3 State ownership and firm performance

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to monitor, decreasing agency costs and improving firm performance (Bos, 1991). The final argument for a positive relationship between state ownership and firm performance is that firms owned by the state of a country do not need to comply very strictly to various rules, like accounting standards. In this case, the firm’s management can choose accounting structures that are in the advantage of the firm and increases performance (Aljifri and Moustafa, 2007). Again, previous studies did not only find proof for positive effects of state ownership on firm performance. There are also various arguments made in de past by several scholars that recognize negative effects of state ownership on firm performance. First, government owned companies tend to be more orientated towards politics rather than to act towards commercial behavior. Together with a lack of entrepreneurial drive, this may lead to poor financial performance (Najid and Rahman, 2011). This was also recognized earlier by Shepherd (1989) and Hart et al. (1997), who suggested that states that own companies are likely to give priority to political goals, such as decreasing the unemployment rate of a country or lowering the prices of output. Many of such political objective are not in the best interest of the company, and will not influence the firm’s performance in a positive way. Finally, there is the argument of Eng and Mak (2003) saying that the often slow and bureaucratic forms of doing business slow down the companies owned by governments, and therefore decreases their performance. To summarize, there are arguments for a positive relationship between state ownership and firm performance, but there are also arguments for a negative relationship. The so called “helping hand” that the government can give to the firms they own, together with less need to strictly comply with various rules which make it possible to choose for performance increasing business systems, are arguments in favor of a positive relationship between state ownership and firm performance. Contrasting, giving priority to political goals and lacking entrepreneurial drive, and slowing down the companies they own because of slow bureaucratic forms of doing business are in favor of expecting a negative relationship between state ownership and firm performance. Because in Europe state-owned companies profit less from “the helping hand “ of the government than companies in other parts of the world (Hausman en Neufeld, 1991), and do recognize the disadvantages of being state-owned (Eng and Mak, 2003), this article sticks to the arguments that state ownership has a negative effect on firm performance. Therefore: H2: Within European firms, state ownership has a negative effect on firm performance compared to

the performance widely held companies.

2.4 Institutional ownership and firm performance

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argues that sometimes the owning companies engage in business transactions with the owned firm which are only in favor of the performance of owning firm, hereby extracting wealth from the owned firm, which in turn decreases its performance. To summarize, institutional ownership, whether by a financial or a non-financial institution, again might affect overall firm performance both in a negative or a positive way. The incentive to monitor and discipline managers, influencing board decisions, engaging in active ownership and in the case of corporate ownership complementing resources, might let us expect a positive relationship between institutional ownership and firm performance. However, the argument that owning institutions are not able to monitor effectively because of the own agency problems, together with the possibility that owning companies engage in business transactions that are only lucrative to themselves, might expect a negative relationship between institutional ownership and corporate firm performance. Because companies owning other companies in Europe are according to Baker-Collins (1998) more long term oriented when they purchase the firm, it is expected here that these owning institutions will not only take advantage of the owned company, but use their competences to strengthen the owned company. A positive effect is expected with regard to ownership by a non-financial institution on firm performance. Therefore:

H3: Within European firms, ownership by a non-financial institution has a positive effect on firm performance compared to the performance of widely held companies.

According to Thompson and Pedersen (2000), European financial institutions are often purchasing balanced firms. After the purchase of such a firm, they do their best to maximize profits they gain out of these firms, while keeping them stable over time. This stability also strengthens the market position of the owned firms (Thompson and Pedersen, 2000) increasing their performance. Thus, a positive effect on firm performance is expected here as well. Therefore:

H4: Within European firms, ownership by a financial institution has a positive effect on firm

performance compared to the performance of widely held companies. 3 Data and measurements

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a total of 60 European companies. Out of these 60 companies, 14 are state-owned (2 in Austria, 2 in Belgium, 3 in Finland, 1 in France, 1 in Germany, 1 in Italy, 2 in Norway and 2 in Portugal), 14 are family-owned (1 in Greece, 1 in Austria, 4 in Belgium, 2 in Denmark, 1 in Finland, 2 in France, 2 in Germany, 1 in Italy and 1 in the Netherlands), 9 are owned by a non-financial institution (1 in Finland, 1 in France, 1 in Israel, 1 in Italy, 3 in the Netherlands and 2 in Spain), 13 of these companies are owned by a financial institution (1 in Portugal, 1 in Sweden, 2 in Belgium, 1 in Finland, 3 in France, 3 in Germany, 1 in Norway, and 1 in Spain) and 10 of these companies are widely held (3 in France, 2 in Finland, 1 in Austria, 1 in Belgium, 1 in Denmark, 1 in the Netherlands and in 1 Germany). In this study, the identities are determined as ultimate shareholders measured on a 20 percent ownership threshold. This indicates that the family, the state, or the (non) financial institution owns at least 20 percent of the shares in the companies that have been studied. Owning 20 percent of the shares is usually enough to effectively control a firm (La Porta et al., 1999). The data that is collected for the companies included in the sample is for 1998 to 2007. The reason that this period of time has been chosen is that after 2007 the economic crisis began, and using data from the years during this crisis would probably have influenced the outcome, making the results unreliable.

3.1 Dependent variable

The dependent variable in this study is firm performance. Obviously, there are many different way to measure the performance of a company. Popular examples of these various possibilities of measuring firm performance are cash flow margin on sales, asset turnover and even employee growth rate (Healy, Palepu and Ruback, 1992). However, these measurements are not used in this study, because they lack any interest in stock returns, which is for a lot of people owning shares in a company an important aspect. Therefore, the dependent variable firm performance is in this study measured by looking at total returns of the sample company stocks. Total shareholder return combines the appreciation of the price of a share with the dividend that has been paid to the person holding the share. This total return is then expressed as an annual percentage (Graham, Kiviaho and Nikkinen, 2013) The advantage of measuring firm performance with this indicator, is the fact that it captures differences between stocks with low appreciation and high dividend pay-outs and stocks with high appreciation and low dividend pay-outs. Also, total return of the stocks of a company is an important indicator for a potential investor whether or not to invest in that company.

3.2 Independent variable

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3.2.1 Family ownership: family ownership is in this study defined when a family or an individual

owns at least 20 percent of the shares in a company. In case of family ownership, there will be no further research into how shares and voting rights are divided among family members. Following La Porta et al.(1999), I assume that every family owns its shares collectively.

3.2.2 State ownership: In the case of state ownership, the government of the particular country owns

at least 20 percent of the shares in a company. Assumed in this variable is that states own companies in order to pursue political strategies at the expense of the people living in that country.

3.2.3 Ownership by a financial institution: Here, with financial institutions are meant (investment)

banks, insurance companies, pension funds et cetera. In the case of ownership by a financial institution, the institution owns at least 20 percent of the shares in that company. Here is assumed that financial institutions often own other companies in order to maximize shareholder value. The focus is often concentrated on financial performance, and the strategy is short-term oriented.

3.2.4 Ownership by a non-financial institution: Here, with non-financial institution is meant any

other company than an (investment) bank, insurance company, pension fund or other financial institution. The non-financial institution should own at least 20 percent of the shares to be an ultimate shareholder. Often, non-financial institutions have completely different motives than financial institutions to own. For this variable, it is assumed that the non-financial institutions own other companies because of their valuable resources, location in a particular country et cetera.

3.2.5 Widely held ownership: Here, with widely held ownership is meant a company that does not have one (or more) ultimate shareholder(s). In this study, a company has a controlling (or ultimate) shareholder when the voting rights of this shareholder exceeds 20 percent. Thus, all widely held companies present in the sample do not have a shareholders whose voting rights exceeds this 20 percent.

3.3 Sample Data

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all the companies included in the sample, the International Securities Identification Number (ISIN) were collected. Then, these ISINs were entered into DataStream. With help of a time-series request, the total returns on stock were collected monthly. Obviously, collecting the necessary data per month for a period of 10 years makes the processing of the data less clear, because of the substantially larger amount of data. However, when there occurs something strange in the dataset, for example a sudden decline of 50 percent in the total return of a companies’ stock, it makes it more easy to determine when this event happened, and what caused that event. Therefore, it makes it also more easy to determine whether or not you should include or exclude that company in the dataset. Because this study requires the comparing of groups, for each company the percentage increase or decline in total return on stock was calculated for the period 1998-2007, by the sum: (total return may 2007 – total return may 1998) / total return may 1998 * 100%. For a few companies included in the sample, there was no data available for a certain part of the period 1998-2007. For these companies, the total return of the first available month was used for calculating the percentage increase or decrease in total return. Eventually, these values are used to determine whether or not there are significant differences between the effects on the dependent variable of the various companies with ultimate owners and the sample companies that are widely held.

3.4 Statistical Technique

As indicated above, the hypotheses formulated earlier require a comparison of the various identities that are discussed in this paper. This comparison has to be based on the average percentage increase or decrease of the total returns of the ultimate owned companies. Because groups (identities) have to be compared, an analysis of variance (ANOVA) test is most suitable here. The ANOVA test is a test which can determine differences in between two or more groups, based on average scores of those groups. The reason that the most simple form of the ANOVA test has been used, and not the so called ‘two-way ANOVA’, is the fact that there is only one independent variable. This ‘two-way ANOVA’ test should be used when two or more groups have to be compared based on multiple independent variables. What should be said about the ANOVA test here is that is a very simple statistical technique. It only measures differences based on the averages of the various groups of companies. Although it will be possible to draw a conclusion based on the test, further research, with other more robust statistical techniques will be necessary to confirm the outcomes of this research.

4 Descriptive results

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Table 1. Minimum, maximum and average increase/decrease per ownership group

IDENTITY OF OWNER__ MAX DECREASE____ MAX INCREASE____ AVERAGE INCREASE/DECREASE Family -21,59% 394,58% 111,33%

State -57,04% 698,42% 170,95% Financial Institution -26,94% 937,64% 144,36% Non Financial Institution N.A. 655,33% 177,24% Widely Held -58,43% 474,39% 210,94% 4.1 Testing the Hypotheses

In order to test the hypotheses, for each group of companies with different ownership identities and for the companies with no ultimate shareholder, the increase or decrease of total return between the period may 1998 and may 2007 was calculated per company. An overview of these companies together with these values can be found in appendix 1. These values were all entered into SPSS. As explained in the methodology part, the statistical procedure in this research is to check whether or not there are any significant differences between companies in Europe with one of the four ultimate ownership identities and companies that are widely held with respect to the dependent variable total return. In order to do so, a one-way analysis of variance (ANOVA) test is performed. The ANOVA test shows a F-value of .273 and a significance value of .845. This result means that there are no significant differences between the companies included in the sample that are owned by a family, a state, a financial institution, a non-financial institution and those companies included in the sample that are widely held. The results of the one-way ANOVA test can be found in table 2.

Table 2. one-way ANOVA test

Sum of Squares Degrees of Freedom Mean Square F Sig._ _ Between groups 34056,679 4 11352,226 ,273 ,845 Within groups 1915576,280 56 41642,963

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Based on this test, the following can be said with respect to the hypotheses presented earlier in this research. The four hypotheses all hypothesize a significant difference, either positive or negative, between one of the discussed ultimate ownership identities and a structure in which a company is widely held. Where there a no significant differences to be found in total returns in the period 1998-2007 after performing the ANOVA test between the four groups of companies with one of the ultimate ownership identities discussed in this research and those companies that are widely held, we can reject all four hypotheses.

5 Discussion and limitations

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variable may be the use of only one indicator for firm performance. It may be possible that the companies included in the sample score totally different on various other performance measurements. As indicated earlier in this article, there are a dozen of ways to measure firm performance. Together with a larger sample size, future research may include various other measurements for firm performance. Doing this may give other insights in the subject, and maybe results in significant differences between the four ultimate shareholder identities and widely held companies with respect to their total return. However, the author is still confident that the dependent variable in this research is a strong measurement for firm performance, because all results of how a company performs are reflected in its total returns. Another possibility to extend this research in the future is to include companies in the sample from other parts of the world. In this research, only companies from Europe are included in the sample. It may be possible that the four forms of concentrated ownership that were discussed in this article perform differently in parts of the world where corporate governance systems are not as sophisticated like those in Europe. For example, it could be that state ownership in China, where the government tries to control a lot of business, has a higher impact on the performance of the owned firm than state ownership by a European country has (Whang, Zhang and Goodfellow, 1998). The same can be for the differences between family owned business in Latin America, where loyalty to the family is far stronger than family loyalty in Europe (Andrade, Barra and Elstrodt, 2001). To investigate whether there can be found significant differences between ultimate ownership identities and widely held companies with respect to the dependent variable, future research should include companies owned by one of the four identities and companies that are widely held from e.g. Asia and South-America. Another issue worth to address, is that there have not been used control variables in this research. Therefore, companies that vary substantially in size have been mixed in the sample. Also, the companies included in the sample operate in various industries. Obviously, when a total industry performs well, it is likely that companies included in the sample that operate in that industry perform good as well. In industries that do not perform very well, it is likely that companies operating in this industry have a hard time to realize positive performance. Therefore, future research on differences in effects of ownership identities on firm performance may focus on specific industries in order to prevent this mix up in the sample.

6 Conclusion

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four identities are (1) family ownership, (2) state ownership, (3) ownership by a financial institution and (4) ownership by non-financial institution. The review of the literature on the positive and negative effects of the different ownership identities on corporate firm performance shows the importance of considering these identities when determining variables that influence firm performance. The different objectives and goals that the ownership identities discussed in this article have with owning a company would expect one to believe that they also influence the performance of the firms that these identities own. But what can be learned from this study? One should be careful here with drawing up conclusions. As mentioned earlier, future research can make this study more powerful by adding more companies to the sample, adding more measurements for firm performance, expand the study to other parts of the world and focus on industries. However, based on a sample of 60 European companies for which has been collected 10 years of monthly data on total return, and with help of an ANOVA test, this study did not provide proof for significant differences between those companies in the sample that are ultimately owned by a family, a state, a financial institution or a non-financial institution and those companies included in the sample that are widely held. The value provided by the ANOVA test did not came close to a significant result. Although this is maybe a somewhat disappointing result, opportunities for future research are ample present, and might be able to bring new insights in the discussion of the effects of centralized ownership identities on corporate firm performance.

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8 Appendix

_ ________________________________ _ ______________________________________________ ___ __ ______________ __Sample Companies_ ___________________________ Family Owned____ _ Total Return 5-1998______Total Return 5-2007_____%_Increase/Decrease

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MAN ROLAND DRUCKMASCHINEN 128,62 160,19 24,55 BAYERISCHE HYPOTHEKEN 1289,12 999,81 -22,44 ELKEM ASA 171,58 498,42 190,49 AUTOPISTAS DEL MARE NOSTRUM 1051,05 3750,54 256,84 Owned by Non-Financial_Institutiton__________________________________________________________

Ultimate ownership and firm performance across Europe: Does identity matter?

Master Thesis for International Business and Management