Closely-held Firms Research Articles

Corporate hedging, family firms, and CEO identity

We study the propensity to hedge of closely-held family-managed firms. Family involvement in CEO positions positively affects the likelihood of hedging. The effect is stronger when the CEO belongs to the founding family, especially for long-tenured and founder CEOs. This evidence is consistent with the higher conservatism of family agents, aimed at protecting socioemotional wealth and avoiding loss of reputation and control. Information asymmetry and, more mildly, underdiversification increase the propensity to hedge. Corporate governance attributes proxying agency issues are not significant.

The role of information asymmetry in closely-held firms’ tax and financial reporting choices

This study examines whether and how closely-held ownership is associated with the relationship between tax and financial reporting aggressiveness. More specifically, we find that although both closely-held and widely-held firms pursue tax savings and higher reported earnings, closely-held firms are less aggressive compared to widely-held firms in pursuing both simultaneously. We argue and find evidence that this is associated with non-controlling shareholders and controlling shareholders concerned about agency costs imposed by each on the other. Furthermore, this finding is driven mainly by firms with high information asymmetry (as proxied by firm size, analyst following and board size), suggesting that information asymmetry is a channel through which closely-held ownership is associated with firms’ tax and financial reporting choices.

Wealth Inequality and Private Savings: The Case of Germany

This paper explores the interaction between corporate ownership concentration and private savings, and by extension, the current account balance in Germany. As high corporate savings largely reflected capital income accruing to wealthy households and increasingly retained in closely-held firms, the buildup of external imbalances in Germany has been accompanied by widening top income inequality, rising private savings and compressed consumption rates. Rising corporate profits in an environment of high business wealth concentration account for 90 percent of the rise in the private savings rate and a third of the increase in the German current account surplus over 1999–2016.

Earnings Quality and Market Values of Indonesian Listed Firms

We find that earnings quality (EQ) is reliably negatively correlated with market values of equity of firms listed on Jakarta Stock Exchange (IDX). The financial reporting process produces earnings viewed as increasingly “incomplete” for valuation purposes by the capital market despite moves towards high-quality financial reporting standards (IFRS) during the sample period 1995-2015. Time-series analyses reveal that EQ is decreasing rather than increasing through time. The role of earnings in valuation is replaced by other attributes, most notably net dividends. Firms that pay out dividends are valued significantly higher, and firms that issue equity are valued lower. These results are robust regardless of other accounting, market and governance controls. Large and closely-held firms are valued higher than smaller firms, consistent with some aspects of the political cost hypothesis. Shares with higher idiosyncratic risk are valued higher, consistent with option value, as are shares where the volume of shares traded is more volatile. Collectively, the results indicate that the mere adoption of high-quality accounting standards (IFRS) and other nominal changes in capital market regulations do not automatically increase the quality of the financial reporting process.

Determinants of Ownership Structures: Evidence from Product Market Competition

We study how product market competition affects firms’ ownership structures using a large sample of closely-held firms in 18 European countries. We show that firms operating in more competitive environments have lower inside ownership and that the stakes of their outside shareholders are more dispersed. These results are explained by competition increasing the need to raise external equity and reducing private control benefits. Our findings suggest that, by changing corporate ownership structure, competition mitigates incentive misalignment among shareholders, leading to better firm performance and gains in economic efficiency.

Exit in Non-Listed Firms: When and How to Use Share Transfer Restrictions?

Share transfer restrictions are typical elements of governance in non-listed firms where members, given the locked nature of investments, are in strong dependence upon each other’s actions and contract for special share transfer clauses to ensure successful cooperation. First purchase rights, such as a right of first refusal and a right of first offer, and tag-along rights stipulate efficient investments by discouraging value-decreasing transfers of shares to third parties and reducing incentives for opportunistic renegotiation. Similar problems arising during the ordinary course of business are solved by different forms of put and call options, including their special buy/sellout modifications – Russian roulette clauses. The study of the best practices of contracting for share transfer restrictions in closely-held firms can help improving the practices of business organization.

The Divergence of Corporate Officer Liability Doctrine Under Patent and Copyright Law

Corporate officer liability doctrines under both the Patent Act and the Copyright Act diverge markedly from traditional corporate, agency, and tort law doctrines. This manuscript explores why the case law in federal patent and copyright cases differs so markedly not only from traditional legal norms, but from each other as well. It posits that the incorrect articulations of individual officer liability found in both patent and copyright law can be attributed to two factors: (1) the different avenues of appeals that patent and copyright cases take that result in different models of legal decision-making; and (2) judicial reluctance to apply the strict liability standard of patent and copyright law to individuals as opposed to entities. The cumulative effect of these two factors is an erosion of the traditional protection offered to corporate officers that puts active owners of small and closely-held firms at particular risk because of the dual roles they occupy.

Holding Corporate Officers Strictly Liable Under Patent and Copyright Law

Corporate officer liability doctrines under both the Patent Act and the Copyright Act diverge markedly from traditional corporate, agency, and tort law doctrines. This manuscript explores why the case law in federal patent and copyright cases differs so markedly not only from traditional legal norms, but from each other as well. It posits that the incorrect articulations of individual officer liability found in both patent and copyright law can be attributed to two factors: (1) the different avenues of appeals that patent and copyright cases take that result in different models of legal decision-making; and (2) judicial reluctance to apply the strict liability standard of patent and copyright law to individuals as opposed to entities. The cumulative effect of these two factors is an erosion of the traditional protection offered to corporate officers that puts active owners of small and closely-held firms at particular risk because of the dual roles they occupy.

Real estate ownership and closely-held firm value

Purpose– The authors aim to measure the value of leasing, versus owning, business locations for the closely-held firm.Design/methodology/approach– The authors examine the sales transactions of small businesses in the USA – those with revenues of less than $20 million per year – between 1995 and 2010. The authors contrast the values of firms that own, and do not own, their real estate.Findings– In general, the authors find negative relationships between closely-held firm values and real estate ownership. Nowhere did the authors observe firm value being enhanced by property ownership.Research limitations/implications– The data set may be limited by the accuracy of the data provided by business brokers. Compared to the capital markets, the small business “exchange” is less efficient, but it is the only source of unlisted business sales data.Practical implications– The findings are important to the small-business broker and the investor. The broker might better advise the buyer and seller with the findings. Business owners, private equity investors, and their advisors, are all reminded to focus on the core business strategy and avoid getting “locked into” real estate ownership in a business investment.Originality/value– The impact of real estate on the valuations of closely-held firms is a largely unexamined area. And there is a lack of consistency on publicly-held company valuations as a function of real estate ownership; these public company findings and the dearth of work on the privately-held company's real estate attract the attention in this study.

Introduction

Introduction

An Investigation of Greek Firms' Compliance to IFRS Mandatory Disclosure Requirements

The paper investigates the compliance with IFRS disclosure requirements and ultimately the quality of financial statements. Using a checklist based on the IFRS disclosure requirements, a compliance score was calculated for a sample of 58 listed, non-finance, Greek firms for the 2006 and 2008 financial statements. Disclosure compliance was measured under the “dichotomous approach” and the “partial compliance unweighted method”. Subsequently, univariate tests and a multivariate regression model were used to investigate what firm characteristics are related with disclosure compliance. Closely-held firms exhibit higher compliance rate, while disclosure compliance is not associated with firms' profitability, leverage and size. There is a positive association between the engagement of a Big-4 international auditing firm and the compliance rate. This study can be of interest to accounting regulators who set disclosure requirements and capital market participants by providing indication regarding Greek firms' compliance with IFRS disclosure requirements. In addition, it examines the disclosure compliance with the important disclosure items of all IFRS rather than focusing in the disclosure items of specific IFRS. By adopting both approaches proposed in literature for measuring compliance, the authors enhance the robustness of the findings of this study, while the authors provide empirical evidence concerning the extent to which the two approaches provide significantly different results. The authors found that the two methods do not produce significantly different results.

Great Expectations from Pension Fund Activism: Insights from an Emerging Market

This study examines private pension funds' preferences for shareholder activism in Poland in closely-held firms that dominate stock exchanges in emerging markets. The results show that the major institutional investors engage in a limited spectrum of shareholder activities. Most often they seek to contact the company's management board members as well as supervisory board members if they are dissatisfied with a portfolio company. None of the funds even considers public criticism or litigation. The form of shareholder activism selected by different funds and the sequence do not vary substantially. The reasons lie in the internal benchmark. However, the largest pension funds tend to be more active than the rest. They choose low-cost and low-risk forms of activism, but they hardly participate in any corporate governance organizations. They avoid highly visible and confrontational activities.

The choice of organizational form by closely-held firms in Sweden: tax versus non-tax determinants

This article makes use of individual data from 2004 to 2008 on owners of closely held businesses in Sweden to estimate the role of both tax and non-tax determinants in the choice to be a closely held corporation (CHC) versus a proprietorship. Although lower-income individuals face relatively neutral incentives, higher-income households face strong tax incentives to be corporate. The data suggest a strong response to these tax incentives. Many conventional non-tax determinants are confirmed in the data as well. Copyright 2013 The Author 2013. Published by Oxford University Press on behalf of Associazione ICC., Oxford University Press.

Ownership structure and minority expropriation: the case for multiple blockholders

This article investigates minority expropriation in closely-held firms. Using a sample of Spanish firms for the period from 1996 to 2006, we find that firms that are more vulnerable to minority expropriation have blockholders controlling groups with aggregate equity stakes that are far removed from 50%, which is the point that maximizes the chances of expropriation. Moreover, performance improves when the controlling group’s stake moves away from the region where expropriation is more likely – the alignment effect – and, if within this region, when the number of group members increases – the bargaining effect.

Financing Decisions along a Firm’s Life-cycle: Debt as a Commitment Device

We analyse the life-cycle patterns of a firm’s financing decisions and their interaction with future growth and development decisions. We derive different financing sequences which we link to existing empirical research as well as derive new testable hypotheses regarding differences in firms’ financing decisions to project, firm, market and country characteristics. We provide a rationale for the importance of (external) start-up debt financing as observed in recent empirical studies. Furthermore, we argue that equity financing at both development stages is more likely for closely-held firms and in countries in which entrepreneurs face high stigmatisation costs.

Concentrated control and corporate value: a comparative analysis of single and dual class structures in Canada

This study directly examines the empirical relationship between corporate value and three distinct ownership structures using data from Canada, where the security laws and shareholder protection conditions are similar to those of the US (La Porta et al., 1999) but corporate control tends to be more concentrated (Holderness et al., 1999). Ownership structure is classified in three ways: dual class firms, single class closely-held firms and widely-held firms. The focus of this article is to test for the impact of concentrated control on corporate value using either dual class or single class closely-held ownership structure. The empirical results, using both fixed and random effects estimation methods, show that after controlling for size, financial leverage, percentage of outside directors and industry differences, dual class companies sell at a significant discount compared to closely-held single class companies. Consistent with Claessens et al. (2002), and Gompers et al. (2004) dual class structure in Ca...

Fiduciary Duties for Activist Shareholders

Corporate law and scholarship generally assume that public corporations are controlled by professional managers, while shareholders play only a weak and passive role. As a result, corporate officers and directors are understood to be subject to extensive fiduciary duties, while shareholders traditionally have been thought to have far more limited obligations. Outside the contexts of controlling shareholders and closely-held firms, many experts argue shareholders have no duties at all. The most important trend in corporate governance today, however, is the move toward shareholder democracy. Changes in financial markets, in business practice, and in corporate law have given minority shareholders in public companies greater power than they have ever enjoyed before. Activist investors, especially rapidly-growing hedge funds, are using this new power to pressure managers into pursuing corporate transactions ranging from share repurchases, to special dividends, to the sale of assets or even the entire firm. In many cases these transactions uniquely benefit the activist while failing to benefit, or even harming, the firm and other shareholders. This article argues that greater shareholder power should be coupled with greater shareholder responsibility. In particular, it argues that the rules of fiduciary duty traditionally applied to officers and directors and, more rarely, to controlling shareholders, should be applied to activist minority investors as well. This proposal may seem a radical expansion of fiduciary doctrine. Nevertheless, the foundations of an expanded shareholder duty have been laid in existing case law. Moreover, there is no reason to believe that newly-empowered activist shareholders are immune to the forces of greed and self-interest widely understood to tempt corporate officers and directors. Corporate law can, and should, adapt to this reality.

Determinants of Performance of Closely-Held (Family) Firms after Going Public: The Role of the Ownership Structure, Economy, Changes in Top Management, Partial Sale, Equity Concentration after the IPO and Shareholders in Management

When a closely-held (family) company goes public, there are very specific and particular determinants that have crucial influences on the post-going public operational, social and financial performance of those firms. We investigate why firms decline significantly their profitability, efficiency, employment and activity levels, and show an increase on sales and capital investment when there is a transition from private to public ownership. We conclude that this decrease in performance is significantly higher, when one or more than one of the following facts happen after firms going public: first, when there are not shareholders in management, what implies increased agency costs; secondly, when the level of equity concentration after going public is low; in third place, when the level of equity retention by the founding shareholder is low; fourth, when the economy health during the timing of the sale is not in good shape; and lastly, when the old CEO is changed.

The relationship between executive compensation and dividend policy, performance, and corporate governance in closely-held firms

This paper examines how profitability, dividend policy and the corporate governance of closely-held companies are related to executive compensation. The main finding is that that in spite of the fact that controlling shareholders, and the executives they nominate to represent them, have the ability to exploit firms’ resources at the expense of minority shareholders, their incentive to do so is lower when their ownership exceeds 75% of the voting power. Specifically, in closely-held firms in which the controlling shareholders hold more than 50% and less than 75%, the incentive to prefer higher compensation and avoid paying dividends is greater than that in companies in which major shareholders hold more then 75% of the firm’s equity. For the latter, since they the vast majority of firm’s shares is held by them, the firm is to a large extent more private than public. In such case, the incentive to exploit minority shareholders is small. Indeed, in companies in which the voting power of controlling shareholders exceeds 75%, their profits are higher, the compensation paid to their executive is lower, and they appear to have the tendency to share more dividends in comparison with other companies

Concentrated Control: A Comparative Analysis of Single and Dual Class Structures on Corporate Value

This study directly examines the empirical relationship between corporate value and three distinct ownership structures using data from Canada, where the securities laws and shareholder protection conditions are similar to those of the US (La Porta et al., 1999) but corporate control tends to be more concentrated (Holderness et al., 1999). Ownership structure is classified in three ways: dual class firms, single class closely-held firms, and widely-held firms. The focus of this paper is to test for the impact of concentrated control on corporate value using either dual class or single class closely-held ownership structure. The empirical results show that after controlling for size, financial leverage, percentage of outside directors, and industry differences, dual class companies sell at a significant discount compared to closely-held single class companies. Consistent with Claessens et al. (2002), dual class structure in Canada lessens corporate value because it lowers shareholder and manager alignment and increases agency problems. We also find that pyramid structure has a negative impact on value in the case of single class closely-held companies.