Individual Shareholders Research Articles

An Inquiry into the Green Disciplining of Capital

‘Following the money’ has become a popular strategy for many NGOs trying to change corporate and institutional practice. Individual shareholders, pension funds, banks, and other investors capitalize projects that cause ecological degradation or social injustice. Pressuring shareholders to divest, invest responsibly, or encourage executives to alter undesirable practices has become de rigueur for civil-society groups working for social change. Such strategies produce value or norm change, greater accountability, activist networks across national boundaries, and improvements in environmental management. Disinvestment helped bring down apartheid in South Africa. But how far can these ‘disciplining’ strategies go in terms of significantly ameliorating ecological destruction and violations of human rights? I explore this question using the case study of the campaign by Friends of the Earth against the operations of Freeport – McMoRan Copper and Gold Inc. in Irian Jaya (West Papua).

Shareholder Diversification and the Value of Control

Individual shareholders often choose to invest a substantial fraction of their wealth in one firm thereby having operational control of the firm through the voting power attached to the shares. In doing so the shareholder reduces the diversification of their personal investment portfolio. A controlling shareholder can also use leverage to increase their voting power, which further increases the risk of their personal portfolio. We argue that the cost of poor diversification reflects the cost of control and we use this in our estimate of the control premium by subtracting the value of shares in the hands of a poorly diversified risk-averse controlling shareholder (Lambert, Larcker and Verrecchia, 1991) from the market value of the shares (Black and Scholes, 1973). This control premium estimate is calculated for a sample of large Swedish firms for which direct estimates of the controlling owners’ wealth are available. We find that the value of control is substantial for individual owners in general, and for the founder in particular. At a Constant Relative Risk Aversion parameter of 2 (3), the average control premium for founders is 12% (25%). The value of control also increases with the size of the controlling voting block.

Employee share‐ownership trusts and corporate governance

The March 2000 Budget in the UK introduced tax incentives to encourage employee shareholding. The theory is that if employees feel that they have a stake in the enterprise or organisation in which they work, they will be more motivated and committed, with positive outcomes in terms of productivity and organisational performance. This theory has received support from research currently being conducted within the School of Management and Organizational Psychology at Birkbeck, University of London, which has found significant positive links between “progressive” human resource practices that promote participation and involvement on the one hand, and corporate performance and organisational outcomes on the other. This is in line with other recent research in the UK and internationally. The question both for business and government is how to engender such participation and involvement and, specifically, whether this can be brought about through employee shareholding, when such individual shareholdings, taken separately, are insignificant in terms of the overall share capital of the corporation. By pooling the voting rights – although not necessarily the actual ownership – of their shares, an employee shareholder trust could represent a significant voice. However, some mechanism is needed to translate individual employee shareholding stakes into a collective voice that can deliver results, both in terms of representing the interests of employees and in convincing employees that their shareholding gives them a stake in the enterprise. Such a move could have important beneficial effects for corporate performance and hence economic growth. It could also have significant welfare effects in terms of enriching the experience of working life.

Internal Control Within the Legal Stucture of UK and German Companies: Prospects for Change

In theory, UK shareholders rely on independent, non-executive directors to monitor management actions. In practice, shareholders are not protected by this mechanism as management traditionally selects its own candidates for the board-typically, similarly situated executives of other companies. Non-executive directors will not, under such circumstances, monitor any more than they themselves would like to be monitored when acting in an executive capacity. Under the German corporate structure, although there is a clear separation of management from control, internal control may be merely superficial. Individual shareholders hand their shares over to banks and, by the use of such shares, strong links are created between banks and other companies, with banks combining various roles such as lending, voting as proxies, sitting on supervisory boards and holding shares. The result is that they often find themselves faced with conflicting interests. In recent years there has been considerable concern in the United Kingdom over the issue of internal control in companies. Simultaneously, the German system is presently undergoing a quiet revolution, which may lead to an overhaul of that model of corporate structure in the near future. This article provides a comparative overview of these developments.

The Impact of Capital Gains Taxes on Stock Price Reactions to S&P 500 Inclusion

This paper contributes to our understanding of the determinants of price responses to inclusion in the S&P 500 by providing evidence consistent with capital gains tax planning impacting stock reactions. Tests are conducted on 426 additions from 1978-1999. We regress the returns on the first trading day following announcement on a capital gains tax measure and controls. The evidence is consistent with the share prices of appreciated firms being temporarily bid up to compensate individual shareholders for any unanticipated capital gains taxes triggered when they sell to index funds and the share prices of depreciated firms being temporarily diminished when individual shareholders sell because buyers and sellers share the tax savings associated with deductible capital losses. We infer from these findings that in rebalancing their portfolios after S&P 500 additions, index funds share individual shareholders' capital gains taxes (or tax savings) through sales price adjustments. Consistent with temporary price pressure, further analysis shows that much of the price reaction unwinds over the following week's trading. Finding that personal capital gains taxes affect stock returns in a setting that does not bias toward taxes mattering suggests that capital gains tax capitalization may be a pervasive feature in equity valuation.

Abolishing Veil Piercing

The corporate law doctrine of limited liability has been much written about, but veil piercing as such has gotten far less academic scrutiny. This article addresses that lacuna, offering a doctrinal and economic analysis of veil piercing. It concludes that veil piercing cannot be justified and, accordingly, advocates abolishing the doctrine. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to effect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large. Veil piercing thus has costs, but no social pay-off. Veil piercing tries to do too much. Allocating liability within a corporate group controlled by a publicly held corporation involves far different policy considerations than does holding liable the individual shareholders of a closely held corporation. These tasks should be unbundled. Intra-corporate group liability issues should be dealt with as a species of enterprise liability, while the liability of individual shareholders is the proper subject of veil piercing law. So defined and delimited, the survival of veil piercing is difficult-if not impossible-to defend. A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading shareholders to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question-did the defendant-shareholder do anything for which he or she should be held directly liable. Did the shareholder commit fraud, which led a creditor to forego contractual protections? Did the shareholder use fraudulent transfers or insider preferences to siphon funds out of the corporation?

Investor relations: perceptions of the annual statement

Explores the perceptions of investment trust chairmen about the role of the annual statement in communications policy and management. A short survey of all investment trust chairmen was undertaken. The results identify two major themes in chairmen’s perceptions of the annual statements role. The statement communicates with individual shareholders and seeks to create good impressions and build confidence. It is primarily a one‐way exchange.

Encouraging Personal Saving and Investment: Changing the Tax Treatment of Unrealized Capital Gains

To increase personal saving and investment and to promote tax neutrality among various investment vehicles, the tax treatment of capital gains unrealized by shareholders should be modified. The current practice of forcing distributions of capital gains to mutual fund shareholders should be changed. Until the shareholder realizes a capital gain through the sale of an asset, no tax liability should incur. With respect to regulated investment companies, the realization point that triggers a capital gains tax liability should be moved from the corporate level down to the individual shareholder level. Since mutual funds are a popular vehicle for saving and investment of middle-income households, this tax reform would greatly increase the incentives for these people to invest and save for their future by increasing their pre liquidation rate of return. The current tax treatment of mutual funds causes the average mutual fund investor to lose between 10 percent and 20 percent a year of their pre-liquidation rate of return. On a $10,000 investment earning a 10 percent annual rate of return, a 2.3 percentage point reduction in the pre-liquidation rate of return would cost a mutual fund investor almost $82,000 over a 30 year period - on a $26,000 investment a mutual fund investor would forego approximately $213,000 over a 30 year period. A change in the tax treatment of mutual funds would have a beneficial impact on all owners of mutual funds, but the benefits would primarily help those making less than $100,000 a year, with 43% of households owning mutual funds earning less than $50,000 a year.

On Expropriation of Minority Shareholders: Evidence from East Asia

As many East Asian countries plunged into economic decline, the structure of concentrated ownership and associated corporate governance, along with weak corporate performance, have been blamed for the crisis. There is little empirical evidence, however, of the nature of ownership structures in East Asia and their relationship to corporate performance in the typical East Asian environment (where inefficient judicial systems, and weak property and shareholder rights are common). The authors examine evidence of the expropriation of minority shareholders for 2,658 corporations in nine East Asian countries in 1996. They distinguish control from cash-flow rights. They also distinguish between various types of ultimate owners, including family, state, widely held corporations, and widely held financial institutions. Higher cash-flow rights are associated with higher market values, consistent with Jensen and Meckling (1976). In contrast, deviations of control from cash-flow rights - through the use of dual-class shares, pyramiding, and cross-holdings - are associated with lower market values. This is especially true for corporations under family control and, in Japan, under the control of widely held financial institutions. They conclude that the risk of expropriation is the major principal-agent problem for large corporations, as suggested by La Porta and colleagues (1999). The degree to which certain ownership structures are associated with expropriation depends on country-specific circumstances. These may include the quality of banking systems, the legal and judicial protection of individual shareholders, and the degree of financial disclosures required.

Happy Returns: The Individual Investor as a Source of New Capital for Rented Housing in a Time of Changing Social Welfare Structures

Recent changes in the ideology of welfare have led to reductions in the scope for some individuals to play their desired part in funding the social welfare system through taxation. At the same time, there is a widely held view in the housing world that over the next 20 years the supply of rented homes is going to be too low to meet rising demand. Prospects for significantly increased public investment in new rented housing look slight. Private finance is now seen by government as the preferred source of capital funds for the creation of extra housing, not only in the private rented sector but also in the housing association sector, and perhaps in future in the local authority sector. However, the financial institutions-the most often quoted source of private finance currently appear reluctant to take on this role, at least in the privately rented sector. Presently, little attention is being given to the individual, as opposed to the institutional, investor. This paper-based on evidence gathered in a national survey of individual shareholders in companies listed on the London Stock Exchange-explores the possibility of individuals becoming more involved in investing capital in rented housing, both private and public. It suggests that there is some interest in such investment among current shareholders who have considerable assets. More specifically, it argues that there is a group of ethical investors who would be willing to invest in rented housing, some of whom may be willing to accept a lower rate of return on rented housing than on competing investments. Together these groups (and other 'socially disenfranchised' citizens) may offer a source of considerable capital to complement that which institutional investors may provide. If such capital is to be forthcoming, policies are required which address their requirements. A number of suggestions are put forward.

Do Institutional Investors Exacerbate Managerial Myopia?

This study analyzes corporate expenditures for property, plant and equipment (PP&E) and research and development (R&D) for over 2,500 firms from 1987 to 1994. We document a positive relation between expenditures for PP&E and R&D and institutional share ownership. This relation is robust to a variety of specifications. We examine the link between firm-level expenditures and institutional ownership by using lead-lag structures and changes in institutional ownership. The data do not support the contention that institutional investors cause corporate managers to behave myopically. Indeed, the data indicate that the presence of institutional shareholders allows managers to invest more in PP&E and R&D than would individual shareholders.

An assessment of the long run impact of the Business Expansion Scheme and the prospects for individual investment in privately rented housing in the UK

The privately rented housing sector has a key role in the UK Government's housing policy for the next millennium. One of the main planks of 1980s government policy for reviving the fortunes of the sector was the extension of the tax reliefs available under the Business Expansion Scheme (BES) to individuals investing in residential property letting companies. Previous research has shown that, in the short run, the BES had a considerable impact on the supply of privately owned housing to let. However, no previous research has been carried out into the effects of the BES on the individuals who invested in it, their intentions towards investment in private renting in the future, including their BES holdings, and their views about the private rented housing sector in general and the policies required to encourage them to invest further capital. This paper sets out the results of the first comprehensive survey of individual shareholders in BES housing companies based on a large-scale national postal survey. It finds that, while most BES shareholders were satisfied with their investment, few intended to retain their BES shares longer than necessary under the tax rules. The probability is that, unless new measures are implemented, most BES properties will leave the privately rented sector in the near future and there is little prospect of significant individual investment in private renting in the medium term. A number of policy proposals are identified which could act in a countervailing way.

Long-term valuation effects of shareholder activism

The objective is to measure how the values of firms are affected when experiencing shareholder activism. According to several researchers, firms can benefit from increased monitoring. If activism prompts managers to focus more closely on shareholder goals, it could enhance firm value over time. Strong positive valuation effects are found for firms following shareholder activism. The valuation effects accumulated to 23% on average by the end of the third year following shareholder activism. The effects appear to be somewhat more pronounced following activism initiated by individual shareholders.

An assessment of the state sector reform in China: Viability of ‘legal person socialism’

Abstract The transformation of the old state enterprises into shareholding corporations is now being attempted as one form of corporatization in China. The Chinese authorities intend to encourage public‐oriented legal persons as shareholders for these shareholding corporations. This strategy, which can be termed ‘legal person socialism’, may be successful to the extent that corporatization brings in more funds and autonomy to the enterprises, but eventually more and more individual shareholders will have to be invited. Only currently ‘profitable’ state enterprises will be transformed into shareholding corporations and be able to sell stocks successfully. For loss‐making enterprises, transformation into shareholding corporations is now rarely permitted by the authorities and will not be a solution even if attempted. Thus, it can be said that the idea of legal person socialism is viable only for currently profitable enterprises if the state concentrates its financial and administrative resources on them, an...

TAKEOVERS OF DIFFUSELY HELD FIRMS: A NONSTANDARD APPROACH

A common theme in the literature on corporate control is that, when share ownership is diffuse, the free‐rider problem prevents raiders from making acquisitions at tender prices below the postacquisition share price. In this paper, we address this question by formulating a nonstandard model of takeovers of diffusely held firms. It is demonstrated that, even when individual shareholdings are infinitesimal relative to firm size, takeovers succeed with positive probability and equilibria exist in which the raider earns substantial per share profits. Further, the Nash equilibria of the game are characterized with regard to raider profit, the aggregate fraction of shares tendered, and the relation between raider profit and the degree of randomization exhibited by shareholder tendering strategies.

Insolvency of a German Limited Liability Company: De Facto Shareholders, Group Liability for Individual Shareholders

Insolvency of a German Limited Liability Company: De Facto Shareholders, Group Liability for Individual Shareholders

Shareholder taxation and aggregate dividend payout: Evidence from the tax reform act of 1986

The effect of shareholder taxation on corporate dividend policy is a major controversy in financial economics. The Tax Reform Act of 1986 eliminated the statutory tax disadvantage of dividends versus long-term capital gains for individual shareholders. Using aggregate time series data I find evidence that corporate dividend payout has become more generous in the period after tax reform.

Auditors and Professional Opinion: A Comment on Section 52 of the Trades Practices Act

In the wake of the House of Lords decision in Caparo Industries v Dickman there has been some apprehension within the auditing profession that there might be possible alternative liability under section 52 of the Trade Practices Act 1974 (Cth) and associated legislation. Baxt stated shortly after the case that in the absence of common law liability, section 52 ’might well be the way in which individual shareholders will seek to make the auditor liable’. Based on their wide operation in other areas the professional journals have suggested that section 52 and similar provisions of State Fair Trading Acts apply to create strict liability for even honest errors or omissions of auditors. There is particular concern that such strict liability may be owed to a wide range of investors beyond the shareholders of the audited company. These fears are probably unfounded. On the contrary, auditors may be uniquely placed to escape this wide net of liability.

After Caparo- Liability in Business Transactions Revisited

In view of the House of Lords' preoccupation throughout the 1980s with curbing the lower courts' expansion of negligence aiFter Anns,' its decision in Caparo Industries v Dickman2 was not unexpected. Essentially, Caparo held that anyone, whether individual shareholder, general investor or institutional lender3 who makes an investment or lending decision in reliance upon a negligently prepared or misleading annual report and accounts which carry an unqualirled opinion, will be unable to sue the auditor for any losses.4 Given the range of commercial situations in which the services of accountants and other rlnancial advisers are called upon, Caparo could not, of course, provide a conclusive ruling on all matters concerning their liability for negligent misstatement. Nevertheless, it is arguable that the House of Lords intended that the maxim caveat emptor should always apply to transactions involving the acquisition of shares, irrespective of the type of document which had been relied upon.5 On this interpretation, in the case of a takeover, the prudent would-be predator should conduct its own investigation into a target company rather than rely on information produced by the target company's advisers. It is indicative of the level of takeover activity in the 1980s that the issue of liability for negligent misstatement in such transactions should have re-emerged so soon after Caparo. The purpose of this note is to review two recent Court of Appeal decisions in this area and then to consider both them and Caparo itself within a wider commercial context. James McNaughton Paper Group v Hicks Anderson & Co6 concerned the friendly takeover of a small group of companies, MK Paper Group Holdings Ltd [MK] by the plaintiffs, a larger group in a related line of business. By 1982 MK was in financial difficulties, and in June that year MK's managing director had started negotiations with the plaintiffs regarding a possible takeover. The acquisition of the group was completed by the end of September and, shortly after, the plaintiffs claimed, they became aware that MK's f1nancial position was far worse than they had expected. Proceedings were eventually instituted against MK's auditors, alleging that a set of draft accounts which they had prepared and which were shown to the plaintiffs, and upon which the plaintiffs had relied in acquiring MK, had negligently

Attorneys' Fees. Substantial Benefit Doctrine. Delaware Supreme Court Grants Fees to Plaintiff Suing As an Individual Shareholder. Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162 (Del. 1989)

Attorneys' Fees. Substantial Benefit Doctrine. Delaware Supreme Court Grants Fees to Plaintiff Suing As an Individual Shareholder. Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162 (Del. 1989)