Download
1 / 25
290 likes | 465 Views
Corporate Finance. La Porta , Lopez-de- Silanes and Shleifer (1999). This paper uses data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms.
E N D
La Porta, Lopez-de-Silanes and Shleifer (1999) • This paper uses data on ownership structures of large corporations in 27 wealthy economies to identify the ultimate controlling shareholders of these firms. • Except in economies with very good shareholder protection, relatively few of these firms are widely held, in contrast to Berle and Means's image of ownership of the modern corporation. • Rather, these firms are typically controlled by families or the State. • Equity control by financial institutions is far less common. The controlling shareholders typically have power over firms significantly in excess of their cash flow rights, primarily through the use of pyramids and participation in management.
Cash flow right and voting right • Cash flow right • The fraction of the dividends paid by that firm that is (eventually) received by the shareholder. • Voting right • The exact control right that the shareholder could vote on corporate decision • Ultimate owner (controlling shareholder) is the one who owns the largest voting right (more than 20% or 10% (a loose criteria)) • When there is one layer of ownership structure and no cross holding, then cash flow right is equal to voting right.
Case 1 Microsoft • Simplest case • Cash flow right=23.7% • Voting right=23.7%
Case 2 Hutchison Whampoa Ltd. (Hong Kong) • Cash flow right and voting right deviate. • Cash flow right=15.365% • Voting right=35%
Case 3 Toyota Motor • A widely held firm (using 20% rule)
Case 4 Samsung Electronics • Cash flow right of Mr. Lee = ? • Voting right of Mr. Lee = ?
Lemmon and Lins (2003) • This paper uses a sample of 800 firms in eight East Asian countries to study the effect of ownership structure on value during the region's financial crisis. • The crisis negatively impacted firms' investment opportunities, raising the incentives of controlling shareholders to expropriate minority investors. • Crisis period stock returns of firms in which managers have high levels of control rights, but have separated their control and cash flow ownership, are 10-20 percentage points lower than those of other firms. • The evidence is consistent with the view that ownership structure plays an important role in determining whether insiders expropriate minority shareholders.
Ownership Structure, Firm Value and Growth Opportunities • There is substantial empirical evidence regarding the relation between ownership structure and firm value (e.g., Morck, Shleifer, and Vishny (1988), McConnell and Servaes (1990) and La Porta (2002)) • Growth opportunities influence the relation between ownership structure and firm value. • Yet investment opportunity proxy (ex. M/B) are endogenous. • Using an exogenous shock • Johnson et al. (2000) find that countries with stronger legal protections for minority shareholders experienced less severe exchange rate depreciation and stock market declines during the crisis than did countries with weaker legal protections.
Case 5 Halim Bin Saad • Cash flow leverage • Calculations for UEM: Management control rights =0.325 (obtained via Renong), management cash flow rights =0.283 x 0.325 =0.092, cash flow rights leverage =0.325/0.092=3.534. • Calculations for KintasKellas: Management control rights =0.624 (obtained via UEM), management cash flow rights =0.283 x 0.325 x 0.624 =0.0574, cash flow rights leverage =0.6241 0.0574 =10.873.
Sample • They begin by collecting financial data from Worldscope for all firms from Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand that are covered by the July 1997 version of Worldscope in order to capture firms in existence prior to the onset of the crisis. • They eliminate firms whose primary business is financial services (Standard Industrial Classification (SIC) codes 6000-6999) and firms not listed on a country's primary stock exchange, resulting in an initial sample of 1,396 firms.
The Effect of Ownership Structure on Stock Returns during the Crisis • High management group control dummy" is set equal to one if the firm has above-median management group control rights ownership, computed within each country, and zero otherwise."
The Effect of Ownership Structure on Stock Returns before the Crisis
Anderson and Reeb (2003) • This paper investigates the relation between founding-family ownership and firm performance. • They find that family ownership is both prevalent and substantial; families are present in one-third of the S&P 500 and account for 18 percent of outstanding equity. • Family firms perform better than nonfamily firms. Additional analysis reveals that the relation between family holdings and firm performance is nonlinear and that when family members serve as CEO, performance is better than with outside CEOs. • Overall, the results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure.
Costs of Family Firms • Fama and Jensen (1983) note that combining ownership and control allows concentrated shareholders to exchange profits for private rents. • Demsetz (1983) argues that such owners may choose non-monetary consumption and thereby draw scarce resources away from profitable projects. • ShleiferandVishny(1997) observe that the large premiums associated with superior-voting shares or control rights provide evidence that controlling shareholders seek to extract private benefits from the firm.
Benefits of Family Firms • Demsetz and Lehn (1985) note that combining ownership and control can be advantageous, as large shareholders can act to mitigate managerial expropriation. • Beyond monitoring and control advantages, James (1999) posits that families have longer investment horizons, leading to greater investment efficiency and to mitigate the incentives for myopic investment decisions by managers.
Research Questions • They examine the impact of family ownership on firm performance by addressing four specific issues. • Are family firms less profitable or less valuable than nonfamily firms? • Does the relation between family ownership and firm performance differ between younger and older family firms? • If founding-family ownership influences performance, is the performance/ownership relation linear over all ranges of family holdings? • Does the level of family involvement or family members acting as CEO negatively impact firm performance?
Sample • The paper uses the Standard&Poors 500 firms as of December 31, 1992 as our sample. • They exclude banks and public utilities due to the difficulty in calculating Tobin’s q for banks and because government regulations potentially affect firm performance. • Firm-specific control variables are calculated with data drawn from the COMPUSTAT Industrial Files. They manually collect data from corporate proxy statements on board structure, CEO characteristics, independent blockholdings, and family attributes from 1992 through 1999 on 403 nonutility/nonbanking firms, yielding 2,713 firm-years or observations.
Performance Regression • Firm Performance=ROA based on EBITDA and net income, and Tobin’s q • Family Firm=binary variable that equals one when the founding family is present in the firm, and zero otherwise
