DISCUSSION OF Dominant Owners and Performance of Continental European Firms

Investor Interference: Corporate Control Mechanisms, Voting and Cash Flow Rights, and Firm Performance

PurposeThe objective of this study is to investigate further the interplay between corporate governance and firm performance with special focus on a situation expected to bring larger agency costs to the firm, that is, when voting rights of the dominant shareholder exceed his/her cash flow rights.Design/methodology/approachThe research is conducted in Canada over a four‐year period from 2002 to 2005 and uses a balanced sample of 130 firms or 520 firm‐year observations. Corporate governance is measured based on the ROB corporate governance index published by The Globe and Mail.FindingsThe results clearly show a positive and significant relationship between the ROB governance scores and Tobin's Q, when there is a separation between voting and cash flow rights. In the absence of any excess voting rights, no significant relation is found between governance and performance.Practical implicationsThe findings suggest that regulators need to exercise caution before deciding whether or not to recommend or impose corporate governance rules for all firms, since the benefits of these rules may vary among the firms.Originality/valueThe study contributes to explaining mixed international evidence on the governance‐performance relationship, while directing attention to the moderating effect of the deviation from the one share‐one vote principle. To the best of the authors' knowledge, no other study using corporate governance indices has taken into account the impact of excess voting rights despite the widespread use of that practice outside the USA.

Dominant Owners and Financial Performance of Continental European Firms

Manuscript TypeEmpiricalResearch Question/IssueFocusing on an environment where ownership concentration is prevalent and where the presence of politically connected directors on the board is the natural form of political connection, we analyze the effect of political connections on earnings informativeness. We also examine a question that has not been considered in previous research, namely, the impact of the level of divergence between the dominant owner's voting and cash flow rights on earnings informativeness for politically connected firms.Research Findings/InsightsWe find that the presence of politicians on the board negatively affects earnings informativeness. We also find a positive impact of the divergence between the dominant owner's voting and cash flow rights on the informativeness of accounting earnings in politically connected firms.Theoretical/Academic ImplicationsWe show that the relationship between political ties and earnings informativeness is explained by an information effect, whereby politicians and shareholders are interested in providing as little information to the market as possible in order to protect political ties from public scrutiny and prevent the leakage of competitive advantages to competitors. Additionally, we show that the positive effect of divergence between the dominant owner's voting and cash flow rights on earnings informativeness in firms that belong to a pyramid is explained both by an alignment effect, whereby political connections promote transparency, as well as by a stewardship effect, whereby the ultimate owner of the pyramid, acting as a steward, places politicians on the board to increase the firm's reputation and reports earnings in good faith.Practitioner/Policy ImplicationsThe results of our study may be useful to regulators interested in increasing transparency in order to promote a more efficient allocation of resources. In particular, the results suggest that in countries where recent reforms aim to improve investor protection and market confidence, regulators should encourage the disclosure of firm political ties. The results of our study may also be useful to investors, financial analysts and auditors, as they highlight the importance of considering specific features of the corporate governance system when assessing the credibility of accounting information.

PurposeThis paper aims to compare the effect of ownership on firm performances in the 1997 and 2008 financial crises. More specifically, it investigates the effect of cash flow rights, control rights and cash flow rights leverage on firm performance. Two conditions motivated the study. First, the 2008 financial crisis happened quickly, so it was endogenous for firms. This setting is ideal to deal with endogeneity problems in a study that involves ownership and performance. Second, during the 2000s, awareness and implementation of corporate governance increased significantly. The authors believe that the markets learn these changes and incorporate them into prices, as suggested by an efficient market hypothesis.Design/methodology/approachThe paper investigates and compares the effect of ownership structure on firm performance in the 2008 subprime crisis period to that in the 1997 financial crisis. Both crises happen unexpectedly, so the authors can expect that the crises are exogenous to firms. The authors use cash flow rights, control rights and cash flow right leverage for the ownership structure dimension. They also study time-series data to investigate the effect of ownership on a firm’s value.FindingsThe study finds that cash flow right and cash flow right leverage did not affect stock performance during the subprime crisis of 2008. It also finds that cash flow right leverage and cash flow right affected stock performance during the financial crisis of 1997. The study attributes this finding to the learning process and improvement of corporate governance during the period of the 2000s. Using time-series data, it finds that cash flow rights positively affect firm performance, suggesting an alignment effect. Ownership concentration improves firm performance. When the study split its sample, it found that the effect ownership on firms’ value is stronger for large firms.Research limitations/implicationsThe study’s main limitation is that it does not test directly the learning process hypothesis. The study contributes to the current literature by presenting more recent evidence on the effect of ownership structure on firm performance in a developing country. The authors argue that markets learn the improvement of corporate governance and incorporate this development into prices. Extending this research to other markets will provide confirmation whether the learning process is an international phenomenon.Practical implicationsThe awareness and implementation of corporate governance should be maintained at least at this level. The positive relationship between ownership concentration and firm performance suggests that concentrated ownership performs monitoring more effectively. Investors should pay attention to ownership concentration.Social implicationsThe finding that prices already reflect corporate governance may suggest that market is monitoring this issue. This seems to be a good finding. Markets can be expected to discipline companies in the implementation of corporate governance. The awareness and implementation of corporate governance should be maintained at least at the current level.Originality/valueThe study contributes to the current literature by presenting additional evidence on the effect of ownership (using cash flow rights, control rights and cash flow right leverage) on firms’ performance in a more recent period and in a developing country. This period is characterized by a significant increase in awareness and the implementation of good corporate governance.

본 연구는 경영자특성에 따라 기업투자요인이 기업가치 및 성과에 미치는 영향에 대해 연구하였다. 경영자특성은 크게 경영자 나이와 주식보유율로 구분하였으며, 조절효과를 살펴보기 위하여 경영자특성을 더미변수 처리하여 상호작용효과를 분석하였다. 코스닥 기업을 중심으로 2011년부터 2017년까지 년도를 선정하여 분석하였다. 분석결과 경영자의 나이와 기업투자요인(광고선전비, 연구개발비 그리고 교육훈련비)의 상호작용효과가 기업가치와 경영성과에 미치는 영향을 살펴본 결과, 숙련된 경영자이며 연구개발비지출이 큰 경우 기업가치에 부정적인 영향을 미치지만 교육훈련비 지출이 큰 경우 기업가치에 긍정적인 영향을 미쳤다. 또한 숙련된 경영자가 연구개발비 지출을 높이면 경영성과에 긍정적인 영향을 미치는 것으로 나타났다. 반면 숙련된 경영자가 교육훈련비의 지출이 높으면 경영성과에 부정적인의 영향을 미치는 것으로 나타났다. 둘째, 경영자의 주식보유율과 기업투자요인(광고선전비, 연구개발비, 교육훈련비)의 상호작용효과가 기업가치와 경영성과에 미치는 영향에 대해 분석하였다. 소유경영자가 광고선전비 지출이큰 경우 기업가치에 부정적인의 영향을 미치는 것으로 나타나고 있는 것을 알 수 있다. 그러나 소유경영자가 교육훈련비의 지출이 높으면 경영성과에 긍정적인의 영향을 미치는 것으로 나타났다.This study examined the effects of corporate investment factors on firm performance and value based on characteristics of CEO. The CEO’s characteristics were classified into age and stockholdings. To examine the moderating effect, characteristics of CEO were analyzed by dummy variable treatment. We selected and analyzed KOSDAQ companies from 2011 to 2017. First, as a results of finding that the relationship between CEO s age and corporate investment factors (education training, R&D, and ADs) affects firm performance and value, when experienced CEO (in the case of older CEO) have large investment on R&D, this factor has a negative effect on firm value and when experienced CEO have large investment on education training, it has a positive effect on firm value. For firm performance, when experienced CEO have large investment on R&D, it has a positive effect on firm performance. Finally, when experienced CEO have large investment on education training, it has a negative effect on firm performance. Second, as a results of finding that the relationship between CEO s shareholdings and corporate investment factors (education training, R&D, and ADs) affects firm performance and value, when CEO as owner have large investment on advertisements, it has a negative effect on firm value. However, when CEO as owner have large investment on education training, it has a positive effect on firm performance.

PurposeThe purpose of this study is to investigate simultaneous relations between corporate governance (CG) practice and cash flow right, cash flow leverage (the divergence between control right and cash flow right of controlling shareholders). The two ownership measures reflect alignment and expropriation incentives of controlling shareholders. This study also examines the effect of multiple large shareholders (MLSs) on CG practice.Design/methodology/approachThe study uses publicly listed companies (PLCs) excluding those from the Indonesian finance sector during 2011-2013 as the samples of the study. Two-stages least squares regression models were used to test the simultaneous relations between CG practice and ownership structure variables. The study develops a CG instrument to measure CG practice based on ASEAN CG Scorecard, that comprehensively covers OECD CG principles and that can be used for panel data.FindingsCG practice has a positive influence on cash flow right and has a marginally negative impact on cash flow leverage, while cash flow right and cash flow leverage have a marginally negative impact on CG practice. Further, the existence of large MLS complements CG practice, but as the control right of the second largest shareholders becomes closer to the largest shareholder, the complement relation becomes less important. State- or foreign-controlled PLCs practice better CG than other PLCs.Research limitations/implicationsStudies on CG/ownership structure need to treat CG and ownership structure as endogenous variables in their research design. In addition, the level of rule of law in a country should be taken into account when examining the relation between CG and ownership structure. The interrelation among CG, ownership structure, capital structure and firm performance has been studied in the context of dispersed ownership structure and strong rule of law. Thus, future study needs to examine the interrelation among these four concepts in countries with high concentrated ownership and weak rule of law.Practical implicationsTo minimize the risk of expropriation, investors in the capital market need to select shares of PLCs that practice CG suitable for the ownership structure of PLCs, have high ownership by the largest shareholder and have no divergence between control and ownership right, and or have MLSs. PLCs may need to choose the level of CG mechanism in the context of their ownership structure and consider the benefits and costs implementing them.Social implicationsThe study supports the “one size does not fit all” perspective on CG and, thus, it supports the recently enacted financial service authority (FSA) rule requiring PLCs to follow the “comply or explain” rule on the CG code for PLCs. The FSA needs to enforce the compliance of PLCs with CG rules and encourage PLCs to implement CG in substance, not just in form. To strengthen the positive impact of good CG practice in attracting investments in capital market, the regulator needs to improve investor protection rules and ensure strong rule of law.Originality/valueThe study is the first to examine the simultaneous relation between CG practice and both cash flow right and cash flow leverage of the largest shareholder. It is also the first that investigates the impact of MLS on CG practice. It explores the complement and substitution relation between the two concepts in reducing agency costs. In term of research design, the study develops a CG instrument that is based on OECD CG principles, that can be used for panel data and that uses public information.

This paper provides further evidence to identify the ultimate controlling structure and the degree of expropriation of minority shareholders of listed companies in Taiwan. Compared with previous research, we focus on analyzing the control (voting) and cash flow rights owned by the controlling shareholder. We further distinguish two opposite effects of the controlling shareholders: the positive incentive effect and negative entrenchment effect. The findings of this paper indicate that Claessens et al. (2000) underestimate the control rights and cash flow rights of controlling shareholders and the proportion of family controlled companies in Taiwan due to insufficient disclosure of ultimate ownership structure. We adopt a simultaneous equation model to examine the relationship between the degree of expropriation of minority shareholder and corporate value. Based on our empirical results, we suggest that the deviation of control from cash-flow rights and the degree of collateralization of the stock held by controlling shareholders are two important variables in measuring the expropriation of minority shareholders. The two measurements also have a negative relationship on corporate value, supporting the negative entrenchment effect. In addition, the more cash flow rights owned by the controlling shareholder lead to higher corporate value, supporting the positive incentive effect. Finally, we suggest the regulations covering disclosure of ownership structure should adopt the concept of the ultimate control. That is, companies should provide the complete information for investors to trace and identify who owns the most votes in the companies and how many votes the controlling shareholder owns to distinguish the positive incentive effect and negative entrenchment effect of controlling shareholders.

Commitment or entrenchment?: Controlling shareholders and board composition

This paper investigates the relationship between control rights, cash flow rights, and firm performance across a sample of 276 China’s private listed companies (CPC) from 2003 to 2008. This paper finds that the performance of firms with pyramid ownership structures (POS) is lower than that of firms with direct controlling ownership structures (DOS). The separation of control rights and cash flow rights, which is the main characteristic of POS, is negatively related to the firm performance. Furthermore, in order to reduce the negative influence of control rights, this paper proposes the following countermeasures: cash flow rights should be increased because it has a positive effect on the firm performance; the supervisory powers of shareholders meeting (SM) should be strengthened because it helps improve firm performance and overrule invalid decisions taken by independent directors in China. This is proved by the findings that show a positive correlation between the attendance rate at shareholders’ meetings and firm performance; moreover, there is no positive relationship between independent directors and firm performance.

The board of directors is one of the components of corporate governance used by the company to improve the firm's performance both in the long and short term so that the characteristics of the board become one of the key factors to running a good governance system for the company, even though having a good board composition is not always makes the company have a good performance because of the conflict of interest that occurs between the principal and the manager of the company so that there is a need for an in-depth study of the impact of capital structure on company performance. This study attempts to assess specifically the characteristics of the board (board size, board diversity, and audit committee) owned by the company to capital structure, then confirmed the effect of capital structure on firm performance and firm value by using ROE for performance and Tobin’s Q for firm value. Was used in the study sample 25 a company that had always entered into the LQ45 index within a time frame of 2015-2019. The technique of analysis that was used in this study was Path Analysis. The results of the testing of hypotheses found that board size and audit committee had a positive impact on capital structure, while board diversity had a negative effect on capital structure, then capital structure had a positive effect on firm performance, otherwise, the capital structure had a negative effect on firm value

The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge, and where many of the checks which formerly operated to limit the use of power disappear.... In creating these new relationships, the quasi-public corporation may fairly be said to work a revolution. It ... has divided ownership into nominal ownership and the power formerly joined to it. Thereby the corporation has changed the nature of profit-seeking enterprise.1

This research discusses the influence of cash flow right, control right and cash flow right leverage on firm value. This research also discusses the influence of corporate governance as moderating variables of cash flow right leverage on firm value. The research has 83 public corporations as research sample. All of the firms kept on the list during observation period that is from 2007-2010. The result of statistical test indicates that cash flow right is the dominant variable influencing firm value. The result shows that cash flow right has a positive effect on firm value, indicating that firm value increases as cash flow right of the controlling shareholder increases. Other variables are inconsistent when tested by using moderating variable or by adding control variables.

This research discusses the influence of cash flow right, control right and cash flow right leverage on firm value. This research also discusses the influence of corporate governance as moderating variables of cash flow right leverage on firm value. The research has 83 public corporations as research sample. All of the firms kept on the list during observation period that is from 2007-2010. The result of statistical test indicates that cash flow right is the dominant variable influencing firm value. The result shows that cash flow right has a positive effect on firm value, indicating that firm value increases as cash flow right of the controlling shareholder increases. Other variables are inconsistent when tested by using moderating variable or by adding control variables.

This paper argues that the structure of corporate ownership varies systematically in ways that are consistent with value maximization. Among the variables that are empirically significant in explaining the variation in ownership structure for 511 U.S. corporations are firm size, instability of profit rate, whether or not the firm is a regulated utility or financial institution, and whether or not the firm is in the mass media or sports industry. Doubt is cast on the Berle-Means thesis, as no significant relationship is found between ownership concentration and accounting profit rates for this set of firms.