Shareholder Ownership Research Articles

An Overview of United States Corporate Governance in Publicly Traded Corporations

The paper was prepared as a national report for the 18th International Congress of Comparative Law to be held in Washington in July 2010. It is an overview of the legal rules and mechanisms designed to protect shareholders and allow manages to effectively run publicly traded corporations in the United States. The particular influences of the focus of corporate governance, federalism (particularly the role of financial scandals) and types of shareholder ownership are discussed. Another reporter deals with fiduciary duty and its enforcement under state law. An edited version of this report will appear in a future edition of the American Journal of Comparative Law.

Family Firm Mergers and Acquisitions in Different Legal Environments

This study analyses family versus nonfamily firm returns under different legal environments when a merger and acquisition (M&A) is announced. The database includes 124 M&As of European-listed firms (15 countries), with acquired firms being worldwide public or private firms (23 countries), over the 2002 to 2004 period. The findings show that family ownership has a positive and significant influence on acquiring shareholder M&A valuation. However, a major shareholder ownership of 32% has a negative effect. The authors also observe that a weaker legal and institutional environment in the target country has a positive influence on acquiring shareholder valuation.

An Overview of United States Corporate Governance in Publicly Traded Corporations

The paper was prepared as a national report for the 18th International Congress of Comparative Law to be held in Washington in July 2010. It is an overview of the legal rules and mechanisms designed to protect shareholders and allow manages to effectively run publicly traded corporations in the United States. The particular influences of the focus of corporate governance, federalism (particularly the role of financial scandals) and types of shareholder ownership are discussed. Another reporter deals with fiduciary duty and its enforcement under state law. An edited version of this report will appear in a future edition of the American Journal of Comparative Law.

An Analysis of ASX Price Queries

This study examines ‘no news’ responses to stock price queries issued by the Australian Stock Exchange (ASX). We find strong evidence that the pre‐query changes in price are driven by informed traders rather than by speculators. First, there is only a partial reversion in prices following a ‘no news’ response by a company in receipt of a price query. Second, the adverse selection component of market spreads rise during the immediate pre‐query period and then decline following the company response. Last, the mean level of institutional shareholder ownership increases in the period immediately prior to an ASX query of a price increase.

The Myth of Shareholder Ownership and Its Implications for Accounting

This paper demonstrates that shareholder ownership, a sacred cow of business, is a myth. According to our legal system, shareholders do not own the Modern Corporation itself, nor do they own the corporate assets or profits. While this finding raises many important questions, the focus of this paper is on the accounting profession. By equating shareholders’ equity to net assets and having it encompass profit, the accounting equation implies that shareholders own the corporate net assets and profit. Insinuating that shareholders have stronger claims to corporate resources than they actually do runs counter to accounting profession’s prime directive to provide useful information. A solution would be to replace shareholders’ equity with its components, such that Assets = Liabilities Capital Retained Earnings. This would better reflect the reality that corporation’s have no legal obligation to give shareholders any of the net assets or profit.

'Empty Voting' and Shareholder Democracy: A Theoretical Perspective of the New Hunting Ground

The shareholder vote is a matter at the core of the governance of the publicly held corporation. Corporate law deals with the agency problem between shareholders and managers by placing the power to monitor in the hands of shareholders. By making voting power proportional to economic ownership shareholders are given an economic incentive to exercise their voting power to maximize firm value. However, the underlying assumption of corporate voting that of a linked set of voting and economical ownership can no longer be relied upon. Innovations in finance, such as derivatives and the growth of share lending have made it easier to decouple voting rights from economic ownership. In this regard, the impact of activist shareholder on corporate governance has recently received considerable attention. In particular, recent scholars have shown that ‘’empty voting’’ - a situation in which an investor accumulates voting power in excess of his economic ownership - is used to influence corporate decision making to generate trading gains. Following the concerns scholars have expressed over empty voting, several regulators in Europe are considering a regulatory response in order to address empty voting. The purpose of this paper is to provide a theoretical framework to assess whether empty voting is harmful for shareholder democracy and to what extent are regulatory measures necessary to adequately respond to it. Chapter 1 will give an overview of the rationale behind corporate laws requiring economic ownership to be tied to voting ownership. It elaborates the ‘one-share one-vote’ principle and vote buying. Chapter 2 explores the variety of mechanisms of decoupling that empty voters can use. Chapter 3 of this paper considers the efficiency implications of empty voting. It discusses what separates efficient empty voting schemes from destructive ones. Chapter 4 describes the ownership disclosure regime of the Transparency Directive that now applies to empty voting. It considers both the disclosure rules that apply to forms of decoupling by outsiders as soft parking. My eventual conclusion will be that regulatory efforts should be undertaken to directly target the existing framework of fiduciary duties in civil law countries to negative empty voters and spare non-negative empty voters as well as other shareholders. However, in common law countries, in which the concept of fiduciary duties for shareholders is relatively limited, corporate law should provide a constrained possibility for corporations to amend their articles of association to limit empty voting. By undertaking these regulatory responses, lawmakers create a legal standing under which shareholders harmed by empty voting of others have a private right to sue the person or entity that cause them harm.

The Determinants of Auditor Switching from the Perspective of Corporate Governance in China

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: This paper reports on the association between the internal corporate governance mechanism of firms and their auditor switching types in the Chinese context. Two types of auditor switching – namely switching to a larger auditor or switching to a smaller auditor – are identified and examined.Research Findings/Insights: Controlling shareholders have the incentive to seek opaqueness gains. The empirical results demonstrate that to realize opaqueness gains, firms with weaker corporate governance generally are more likely to switch to a smaller auditor rather than to a larger one.Theoretical/Academic Implications: The empirical results demonstrate that firm‐specific corporate governance devices will affect a firm's auditor switching decision. An effective corporate governance mechanism may inhibit the controlling shareholder from switching to a smaller auditor to exploit the minority shareholders. The emerging economies are usually featured with concentrated ownership and insufficient legal protection of minority shareholders. Compared with prior studies, this paper generates findings more applicable to the emerging economies.Practitioner/Policy Implications: This study may facilitate market regulators and participants to maintain close monitoring of the structural arrangement of corporate governance of the listed firms, the independent auditing process and the credibility of financial reporting in an emerging market like China. The findings also suggest that in order to bolster the confidence of the market participants, the Chinese government should promote the reform of the corporate governance system and enforce effective regulations, in particular on firms' auditor switches.

Insider trading, pricing and the long-run performance of IPOs: evidence from the French market during the high-tech bubble

This article empirically examines the relationship between insider (entrepreneurs and venture capitalists) trading and underpricing and long-run performance in a sample of 120 initial public offerings (IPOs) that took place on the Nouveau Marché in France during the high-tech bubble. We hypothesize that insiders were better informed than the market about the future prospect of the firms, particularly during the high-tech bubble characterized by strong information asymmetry. Trading activity was measured at the IPO date and over a three-year period after this date. We find no evidence suggesting that entrepreneurs and venture capitalists knowingly issue overvalued equity at the IPO date. However, there is weak, but statistically significant, evidence that suggests that entrepreneurs and venture capitalists acquire private information during the first years of flotation and have the ability to take advantage of it by selling overvalued equity. Both these types of insider seem to be the best informed on the future value of the firm. However, changes in ownership of banks and other shareholders are not followed by significant change in the firm's long term value.

Is CEO Duality Always Negative? An Exploration of CEO Duality and Ownership Structure in the Arab IPO Context

ABSTRACTManuscript type: EmpiricalResearch Question/Issue: This paper examines the relationships between initial public offering (IPO) underpricing, CEO duality, and strategic ownership in 12 Arab countries of the Middle East and North Africa (MENA) region.Research Findings/Results: Using all IPOs from January 2000 until the end of July 2007, we document an average IPO underpricing of 184.1 per cent. Underpricing is higher in IPO firms that have CEO duality. However, strategic shareholders, such as corporations and other industry‐related investors, are likely to play a monitoring role whereas underpricing is found to be lower in firms with both CEO duality and strategic shareholder ownership. Moreover, the negative relation between underpricing and strategic blockholding is greater for foreign strategic ownership than it is for domestic strategic ownership.Theoretical Implications: This paper examines the level and determinants of IPO underpricing in the MENA region. It provides evidence on the role played by foreign strategic owners in reducing agency conflicts and information asymmetries within an environment where firms may be affected by the cultural issues related to political ties and family involvement.Practical Implications: Our results contribute to the existing debate on the appropriate regulations for an effective and stable financial system in Arab countries. They offer policy‐makers additional evidence on the positive impact of market openness to foreign shareholders.

Ownership structure and the risk-return profiles of Japanese stocks

This paper empirically investigates how ownership structure of Japanese firms affects the risk-return profiles of their stocks. We find significant relationships between ownership and firms’ operational performance, i.e., the ownership of financial institutions is associated with poor performance while the ownership of large shareholders is associated with the opposite. However, comparing the returns on portfolios sorted by ownership, we find no significant relationships between ownership and the rates of returns. Specifically, excess returns are insignificant after controlling for three risk factors (i.e., market, size, and value) while factor loadings are significantly different across portfolios, i.e., the ownership of financial institutions is associated with low-risk, low-return portfolios while the ownership of large shareholders is associated with the opposite

The Anglo-Saxon corporate governance model in Asia

This paper investigates the effectiveness of the Anglo-Saxon corporate governance model in Asia. The paper finds that all of the investigated Asian economies issued new corporate governance codes to promote best practices in the Anglo-Saxon model after the 1997-1998 Asian financial crisis. In our sample, the majority of listed firms in Asia implement a separate CEO/chairperson position and appoint a significant number of non-executive directors on the board. The result of this study also indicates that the prediction of the agency theory is valid under the Asian context. Using the combined sample of all Asian economies, we find that ownership concentration has a positive relation on firm performance and the controlling shareholder's ownership has a decreasing positive link with firm value. In addition, firms with a board dominated by non-executive directors are associated with higher performance, and smaller boards are linked with better performance. The paper also finds that the Anglo-Saxon corporate governance model is more effective in Asian countries adopting the continental law system and without the influence of Confucian values.

Level 3 Communications, Inc.

This case illustrates the financing decision of Level 3, a fast-growing telecom company, in the summer of 2002. There had been severe downsizing in the telecom industry and Level 3 wanted to take advantage of this opportunity by acquiring financially-distressed competitors that would complement and expand its business. To do so, it needed a source of financing. Issuing debt was a problem because the company's bonds were junk-rated. Issuing equity was a problem because the firm's stock price was considerably below its peak price. As a result, the company was considering a convertible bond issuance, which would preserve shareholder ownership to a greater extent than would an equity issue. It also offered a lower interest rate than straight debt. The convertible bond alternative needed to be priced and compared to the options of issuing straight debt or equity.

Comparison Study on Shareholder Wealth and Ownership Structure in China and Korea

Ownership structure which is the base of corporate governance is mainly related to two aspects, concentration of ownership and composition of ownership. Ownership structure determines concentration of ownership and roles of different share owners thereby influences economic behaviors of share owners and behavior effects. Ownership structure directly influences inter surveillance mechanisms. In this paper, we examine the effect of governance variables and firm characteristics such as ownership structure, leverage, size on the firm value (stock return) and the determinants of the change of firm value during post-crisis down period in Korea and China. And as a result, we find that ownership structure can be the main force to the changes in firm value in emerging markets. Our results will support the relationship between corporate governance and firm value in East Asia such as China and Korea. JEL classification: G14, G15, G21, G32, G33

Exploring the Effects of China's Two-Tier Board System and Ownership Structure on Firm Performance and Earnings Informativeness

This study empirically explores whether, and how, selected attributes of China's two-tier board system affect Chinese firms' performance and earnings informativeness. Using a data base of 4623 firm-year observations over the 1999 to 2003 period, we find some effects that mirror ones reported in non-Chinese settings, such as positive correlations between firm performance and the proportion of independent Board of Directors (BoD) members and the frequency of Supervisory Committee (SC) meetings; as well as positive correlations between earnings informativeness and the proportions of independent BoD and SC members. Significant effects also are found for concentrated non-state ownership and existence of foreign shareholders. These exploratory findings provide impetus for further research in the Chinese setting, the findings of which may help refine general knowledge on the role of corporate governance.

Laws versus Contracts: Shareholder Protections and Ownership Concentration in Brazil, 1890–1950

This article examines some of the institutional conditions that facilitated the development of equity markets in Brazil. A critical factor was the addition to corporate bylaws of protections for investors, which enabled relatively large corporations in Brazil to attract investors in large numbers. By availing themselves of this strategy, the firms generated a relatively low concentration of ownership before 1910. Archival evidence, such as company statutes and shareholder lists, reveals that the addition of voting rights to their bylaws, particularly maximum-vote provisions and graduated voting scales (which stipulated that less-than-proportional votes increase in parallel with shareholdings), allowed many Brazilian corporations to balance the relative voting power of their small and large investors. In companies that made such arrangements, the concentration of ownership and control was sharply lower than in the average company. Judging by the Brazilian companies examined for this article, it also appears that the concentration of control was significantly lower before 1910 than it is today.

Outside Directors, Ownership Structure and Firm Profitability in Korea

The contribution of outside directors to firm performance has been shown to be inconsistent. Korean companies first began in 1998 to introduce outside directors to carry out governance reform. This paper analyses the impact of outside directors on corporate performance during the governance reform movement undertaken in Korea in 1999 as well as the moderating effect of the large shareholder and managerial ownership rate. We hypothesised a positive relationship between outside director effectiveness (outside director participation rate) and firm profitability, a negative moderating effect in terms of large shareholder ownership and managerial ownership, and a positive moderating effect when it comes to blockholder ownership. This moderating relationship is considered in order to investigate the role of large shareholders under the Korean governance structure. Our empirical analysis showed that outside directors had a weak positive impact, and that a large shareholder ownership rate and a block shareholder ownership rate moderated this relationship in a negative fashion. The managerial ownership rate did not show any significant moderating effects. We thus conclude that it is too early to assess the impact of outside directors on corporate performance, and that Korean companies exhibit an “owner‐controlled” governance structure; that is, they are governed by large shareholders who have demonstrated a resistance to attempts to bring about governance reform through such means as the introduction of outside directors. Outside shareholders were found to possess insufficient power to monitor large controlling shareholders. This paper seeks to make a contribution to the field by conducting an analysis of governance structure in Korea in the aftermath of the currency crisis, as well as of outside directors in emerging economies, a subject rarely dealt with in governance studies.

Ownership Structure and Debt Leverage: Empirical Test on French

Debt is traditionally analyzed as disciplinary in the shareholders-manager conflict. It is less commonly analyzed in relation to controlling and outside shareholders. This paper shows that the joint problematics of ownership, private benefits and debt leverage are linked in a framework of financial governance. At the same time, debt helps to manage the conflict because it may be easier for the controlling shareholders to modify the leverage ratio than to modify his share of capital. A model shows that debt appears as a key governance variable as it can moderate private benefits or, conversely, may help diversion. The entrenchment effect and the fear for failure may explain the impact of debt. The existence of self-limited appropriation logics is highlighted as well as the importance of the information policy adopted by the controlling shareholders. In this paper, we test a possible non-linear relation between shareholders ownership and leverage. Using a sample of 118 French listed firms over the period 1998-2002, our results show that controlling shareholders ownership is linked with debt at different stage. At low levels of ownership, controlling shareholders use more debt in order to inflate their stake in capital and resist to unfriendly takeovers attempts. When ownership reaches a certain point, controlling shareholders' objectives converge further to those of outside shareholders. Moreover, the fear of financial distress will prompt controlling shareholders to reduce the firm's leverage ratio.

Shareholder Disagreement, Investment, and Ownership Structure

Shareholder Disagreement, Investment, and Ownership Structure

The Role of Outside Shareholders, Outside Boards, and Management Entrenchment in CEO Selection

Large outside shareholders, outside boards, and management entrenchment influence the choice of inside or outside CEOs. In a sample of 385 CEO changes from 1979 to 1986, the probability of selecting an outside CEO rises with the level of stock ownership of large outside shareholders and the fraction of the board seats held by outsiders. It falls as management entrenchment increases, as firm size increases, and as firm performance improves. Shareholder value increases more with outside than inside CEO selection. Also, more shareholder value is lost the higher the level of ownership by the new CEO relative to the level of ownership by the outgoing CEO, unless the firm has a large outside shareholder. The results are consistent with the view that large outside shareholders play an active role in controlling manager-shareholder conflicts.

Takeovers, Market Monitoring, and International Corporate Governance

We theoretically and empirically examine the role of the international takeover market in improving corporate governance standards across countries by curtailing dominant shareholder influence - globally, a principal source of agency risk. In our model, firms are privately informed of takeover synergies and suffer from dominant shareholder moral hazard. But in equilibrium, firms with superior growth-options cross-list in countries with active takeover markets - such as the US - and voluntarily dilute the dominant shareholder's ownership to credibly reduce their (equity-based) expected cost of acquisitions globally. Empirical tests using a sample of 364 foreign firms cross-listing in the US, primarily during 1990-2004, substantially support the main predictions from the model. In the post-listing phase, dominant shareholder ownership and post-listing dilution, along with other proxies for high growth options and strong governance mechanisms, significantly influence the hazard rate, the total number, and the financing mode of acquisitions globally.