Shareholder Control Research Articles

Hedge Fund Ownership, Board Composition and Dividend Policy in the Telecommunications Industry

This paper examines the impact of hedge fund ownership, mutual fund ownership, board composition and large block ownership on the dividend policy of telecommunications firms. The paper is intended to test the agency cost hypothesis for dividends, in which dividends serve as a substitute control mechanism in circumstances in which shareholder control has been attenuated. The evidence suggests that hedge fund ownership serves as a substitute for dividends as a corporate control mechanism to alleviate agency problems. However, the same case cannot be made for mutual fund ownership. The evidence also suggests that board independence increases the likelihood and the magnitude of a dividend payout. Furthermore, the results also indicate that the joint presence of independent boards and large shareholdings reduces the likelihood of a dividend payment. The latter two results suggest that greater independent board representation provides an effective medium for shareholders to extract dividends as well as a complement to top shareholder concentration in relieving agency costs. Overall, the results provide ample support for an agency-theoretic explanation of dividends.

Earnings management and the contest to the control: an international analysis of family-owned firms

In this paper, we focus on the conflict of interests among shareholders as a possible determinant of earnings management. Using a sample of 3559 listed firms from the United States, Canada, the United Kingdom, France, Spain and Italy between 2008 and 2013, we analyse how the distribution of power among shareholders affects earnings management in family-owned firms. We find that the contest to the dominant family shareholder is relevant: namely, the more challenge to the control of dominant shareholders, the less earnings management in family firms. This contest is more important in civil law countries in which the shareholders rights are less protected. We also find that the nature of the blockholders can be relevant: consistent with the view that non-family shareholders are under more public scrutiny and have more difficulty to agree with the largest family shareholder to extract private benefits, our results suggest that a second or third non-family shareholder can reduce or alleviate earnings management.

Corporate Governance Without Shareholders: A Cautionary Lesson From Non-Profit Organizations

For over 80 years, debate over corporate governance has centered on the balance of authority between the board and shareholders. One side in this debate advocates “shareholder primacy”, so that directors would actually be chosen by and accountable to the stockholders. The other side touts “director primacy” and keeping shareholders weak. This side claims that directors who are free of shareholder control would strive to maximize long-term firm value, and have the wisdom and independence to pursue this goal intelligently and conscientiously. The boards of non-profit organizations (“NPOs”) are self-perpetuating: They are not answerable to shareholders because they have no shareholders. If director primacists are right, NPO boards should function as director primacists wish corporate boards would. The reality is quite the contrary. Commentators agree that NPO boards are generally worse than corporate boards. This brief article describes the functioning of NPO boards, discusses why they are so dysfunctional, and what lessons their example holds for corporate governance.

Special Legal Instruments for Placement of Shares in the Course of a Joint-Stock Company Reorganization: 'Stock Conversion Procedure'

We have analyzed the content and described the procedure of a special legal instrument used in course of issuable securities placement within the framework of reorganization, i.e. stocks conversion procedure. We have considered its influence on the equity capital structure of legal successors. We found out that stocks conversion procedure is a sequence of actions aimed at the determination of securities’ quantity to be issued to every shareholder in place of cancelled stocks of the legal predecessor using a specific stocks conversion ratio. Differences in the stocks conversion procedure are related to stocks conversion, as to whether every share shall be converted separately, or just a certain set of shares which shall be subject to conversion.We have described three types of candidate procedures aimed at determination of securities quantity to be placed to a shareholder while using the stocks conversion method. We formulated mathematical model for every algorithm. We analyzed the stocks conversion procedure under conditions of cross-shareholding by shareholders of a company under reorganization. The proposed method enables us to determine the real participation interest under the actual control of certain shareholders in the context of their indirect participation in equity capitals by virtue of other legal bodies. Nowadays, it is a very pressing problem to reveal the real dependence and affiliation of the participants in the economic turnover.

Democracy and shareholder's participation

Democracy and participation of shareholders or the demand for their active participation in the meetings of the Assemblyhas increasingly gained in importance in modern conditions. This is because, negative trends of passivation, the limitations of democratic potential of shareholders and shareholders' rights abuse by the management body, especially in the work control and compensation policy of shareholders, have been observed in a detailed analysis of the application and results of the Shareholder Rights Directive. The passivity of shareholders, as one of the most striking features of their position in the joint stock company today, is the biggest problem and threat to democratic processes within the company. If we bear in mind that the most common definition of shareholder democracy is 'ability of shareholders to influence the management of the company', we can notice a clear picture of the seriousness and importance of the lack of shareholder participation. This is the reason why the author of this paper gradually examines the causes and consequences of the passivity of shareholders, the proposed changes in this context in the Law of the European Union and the practical implications of such solutions in practice. In addition, the author examines contemporary forms and conditions for shareholder democracy and the legal framework in the European Union and the Republic of Serbia. In this way, we analyze the situation in this area and point out shortcomings of certain solutions, as well as the implications they cause in practice. The main thesis from which starts the scientific work and which will be gradually proven through theoretical and practical analysis is that the wider social processes directly reflect on the state of the joint-stock companies, or the state of corporate governance. This means that the negative trends of modern democracy (in the constitutional sense) are almost mirrored in economic capital (EC) and our attempt in this paper is to prove that, through the analysis of existing solutions. On the other hand, some solutions of shareholder democracy are applicable in terms of contemporary socio-political relations and can produce a certain positive impact on the democratic processes.

Investigating the Relationship between Managerial and Family Ownership and Firm Performance of the Companies Listed in Tehran Stock Exchange

The aim of this paper is to examine relationship between managerial and family ownership structure on the firm performance. The sample consists of 93 companies listed on Tehran Stock Exchange for the year from 2004 to 2012. The study shows that equity ownerships in Iran are concentrated on few owners mainly by the State government, families or large corporations. Results reveal that managerial ownership relates significantly to return on assets (ROA) and return on equity (ROE) while family ownership relates significantly to Tobin's Q, ROA and ROE. Results suggest that an increase in the proportion of insider ownerships enhances the company performance due to re-alignment of internal and external interests and reduction in conflict of interests among shareholders. The results further indicate that the firm performance decreases when the managers’ share ownership increases. Managers with greater control and large shareholdings are more concerned with their own self-interests than the interests of the shareholders at large.

Debt Covenants and Cross-Sectional Equity Returns

This paper investigates the impact of debt covenant protection on the cross section of equity returns with a firm-level covenant index and four sub-indices. We find that firms with weaker covenant protection (lower covenant index levels) earn significantly higher risk-adjusted equity returns than do those firms with greater covenant protection. These results are stronger for covenants indices that are related to investments, subsequent financing and event risk. The difference between high and low covenant index stocks is more pronounced when agency problems between shareholders and debtholders are more severe, suggesting that the covenant effect arises from an inability to control shareholder risk-taking.

Boards-R-Us: Reconceptualizing Corporate Boards

State corporate law requires director services be provided by “natural persons.” This Article puts this obligation to scrutiny, and concludes that there are significant gains that could be realized by permitting firms (be they partnerships, corporations, or other business entities) to provide board services. We call these firms “board service providers” (BSPs). We argue that hiring a BSP to provide board services instead of a loose group of sole proprietorships will increase board accountability, both from markets and judicial supervision. The potential economies of scale and scope in the board services industry (including vertical integration of consultants and other board member support functions), as well as the benefits of risk pooling and talent allocation, mean that large professional director services firms may arise, and thereby create a market for corporate governance distinct from the market for corporate control. More transparency about board performance, including better pricing of governance by the market, as well as increased reputational assets at stake in board decisions, means improved corporate governance, all else being equal. But our goal in this Article is not necessarily to increase shareholder control over firms – we show how a firm providing board services could be used to increase managerial power as well. This shows the neutrality of our proposed reform, which can therefore be thought of as a reconceptualization of what a board is rather than a claim about the optimal locus of corporate power.

Multiple Large Shareholder Structure and Governance: The Role of Shareholder Numbers, Contest for Control, and Formal Institutions in Chinese Family Firms

AbstractThe principal–principal (PP) perspective of corporate governance shows that multiple large shareholder (MLS) structure has competing monitoring and entrenchment governance effects. We argue that the dominant effect depends on contest for control among large shareholders and the number of large shareholders involved. Using data from Chinese family listed companies from 2004 to 2007, this study shows inverse U-shaped relationships between contest for control and corporate market value, as measured by Tobin's Q, and between the number of large shareholders and corporate market value. Findings indicate that at low to medium levels of contest for control or number of large shareholders, formal institutions can strengthen MLS structure's monitoring effect and can help this effect last longer. As a whole, the findings extend the institution-based view in the context of family corporate governance by showing that formal institutions can shape the ability of MLS structure to exert governance.

FINANCIAL RESTRUCTURING DRIVEN BY SINGLE PRESENCE POLICY (SPP) (A CASE STUDY MERGER AT PT. BANK NIAGA TBK AND LIPPO BANK TBK)

The issuance of Single Ownership Policy stated in PBI No. 8/16//PBI/2006 has an implication on the controlling shareholders in more than one bank. The shareholders are given three choices to make adjustment of their structure of ownership in order to match it with the single ownership policy. One of the choices available is merger. At one side, merger can increase its capital and minimize the number of existing banks. On the order side, merger can also result in monopoly that inflicts loss to the fair business competition. The first objective of Financial Restructuring or Merger is to take measures that avert the impending insolvency and that ensure the sort-term survival of the business. This is the prerequisite for a sustainable restructuring process. The medium and long term goal of financial restructuring is reestablishment of a healthy and solid capital structure. In Bank Niaga and Lippo Bank merger process was driven by Single Presence Policy which normatively obligates the controlling share holders of a bank to consolidate its share possession by divesting their share, merging or even forming a holding company. One of the existing controlling share holder by far already got impacted by this policy is Khazanah National Berhad, a foreign investor from Malaysia, who used to control Bank Niaga and Lippo Bank. The SPP indicated its implementation in Indonesia, which foremost align with vision of Indonesian Banking Architecture which is to designate healthy, strong and dynamic national banking structure.

The Governance Challenges of Corporate Political Activity

This article explains the rationale for study of the governance challenges of corporate political activity. The topic is important, especially in light of the U.S. Supreme Court’s 2010 Citizens United decision, but understudied to date. The authors review the literature bearing on this topic. The authors separate consideration of the topic into macro-level and micro-level issues. The macro level concerns the societal perspective. At this level, key research questions concern whether corporate political activity be allowed, and how it should be regulated. The micro level covers managerial and shareholder control over corporate political activity. At this level, key research questions include concern whether the firm should practice political activity and how to regulate practice through professional self-regulation, ethical guidelines, and corporate governance systems control. The remainder of this article contains focused summaries of the articles selected for this Special Issue. Each article is introduced and evaluated against the key research questions at the macro or micro levels of analysis.

Dynamic capital structure with heterogeneous beliefs and market timing

This paper builds a dynamic trade-off model of corporate financing with differences in belief between the insider manager and outside investors. The optimal leverage depends on differences of opinion and can differ significantly from that in standard trade-off models. The manager's market timing behavior leads to several stylized facts, such as the low average debt ratios of firms in the cross section, the substantial presence of zero-debt firms that pay larger dividends and keep higher cash balances than other firms, and negative long-run abnormal returns following stock issuance. Market timing behavior leads to substantial losses of firm value through excessive financing activities. Market timing and debt conservatism depend negatively on shareholder control of the firm.

How Controlling Shareholders Impact Debt Maturity Structure in Taiwan

AbstractUsing data on listed companies in Taiwan from 1998 to 2009, our study investigates how controlling shareholder structure can affect debt maturity structure. The results indicate a significant negative relationship between ownership and debt maturity in the sample companies when control rights are lower than required control shareholdings. Conversely, the results also demonstrate that the separation of control from ownership displays a significant positive impact on debt maturity for controlling shareholder structure when control rights exceed cash‐flow rights. Overall, our results show that there is an inverted U‐shaped non‐linear relationship between control rights and the duration of liabilities in the control structure of ultimate controlling shareholders. Further, the consequence is that we find the required control shareholdings ratio serves as an important criterion in analyzing it, when dividing the control rights structure based on controlling shareholders into different combinations.

The Principle of Shareholder Primacy in Company Law from a Nordic and European Regulatory Perspective

In the EU as well as in the US there is an ongoing debate of which role shareholders should play in companies. This debate includes both theoretical discussions on the nature of companies and practical discussions on the various situations where shareholder involvement is required. The role of shareholders in companies life is considerably different in the EU Member States and in the US.A shareholder-oriented approach prevails in the US and de facto also in the UK, while a more stakeholder-oriented view often is said to dominate in the Nordic countries as well as in Austria, Germany and the Netherlands. One of the main aims of the European Commission’s Action Plan is to strengthen the position of shareholders in the company. In order to ensure that the shareholders are able to play an active role in the company’s decision–making process, a growing number of measures have been adopted both at national and EU level which shall ensure an improvement of the corporate governance system. Moreover, several recommendations have been drafted by the Commission with the aim to improve transparency and shareholder influence.The terms characterizing this debate differ: In the Nordic countries the term ‘active ownership’ (‘aktivt ejerskab’) is often used; in the international debate terms like ‘shareholder activism’ and ‘shareholder democracy’ are used to refer to the discussion of the role of shareholders. Especially, but not only, in the American debate the term shareholder primacy is used. However, all these terms are merely headlines which should be filled out and codified by rules of (national) Companies Acts. The underlying message of active ownership is that the law should provide for easier access for shareholders to be active owners. Shareholder activism requires that constraints on shareholder control should be removed and that shareholders, namely institutional shareholders, should (be obliged to) use their voting rights and other means of influence. Shareholder democracy asks for an approach which gives shareholders the power to influence and to determine a company’s course of life. Consequently the different terms define, to a certain extent, a common basis for the role of shareholders. In short, this common basis implies that shareholders are the ultimate decision-takers of the company and define the company’s objective. This common basis is the fundamental content of the term shareholder primacy which is more closely examined in this article. The goal of this article is to define the principle in a Nordic and European perspective, however the focus is mainly on Nordic company law. The European principle may not necessarily be identical with the US concept.It is important to address the role of shareholders when drafting European company law provisions. In order to secure consistency in European regulation and work for European convergence in company law, it is in our view to seek for and to define a general principle on European shareholder primacy from a regulatory perspective.

Partial privatisation and firm performance: evidence from China's state-owned enterprises

This paper investigates the performance changes of 390 state-owned enterprises (SOEs) in China during 2000–2008 with the existence of share issue privatisation (SIP), and analyses the macro and micro determinants of these changes. We find that SIP significantly improves SOEs’ output and efficiency, and the performance changes vary along with different macro and micro factors. Economic growth, industry regulations, regional marketisation, institutional investors, and equity refinancing are positively related to performance changes. However, capital market development, control of large shareholders, contest of shareholders, and capital occupation exhibit significant negative impacts on firms’ performance changes.

Reining in excessive risk-taking by executives: the effect of accountability

Performance-contingent compensation by means of stock options may induce risk-taking in agents that is excessive from the point of view of the company or the shareholders. We test whether increasing shareholder control may be an effective checking mechanism to rein in such excessive risk-taking. We thus tell one group of experimental CEOs that they may have to justify their decision-making processes in front of their shareholders. This indeed reduces risk-taking and increases the performance of the companies they manage. Implications are discussed.

Expropriation of minority shareholders and payout policy

This paper studies the payout policy of Italian firms controlled by large majority shareholders (controlled firms). The paper reports that a firm's share of dividends in total payout (dividends plus repurchases) is negatively related to the size of the cash flow stake of the firm's controlling shareholder and positively associated with the wedge between the controlling shareholder's control rights and cash flow rights. These findings are consistent with the substitute model of payout. One of the implications of this model is that controlled firms with weak corporate governance set-ups, in which controlling shareholders have strong incentives to expropriate minority shareholders, tend to prefer dividends over repurchases when disgorging cash.

A Director Primacy View on CEO Dismissals

What is the role of shareholders in CEO dismissal decisions? The shareholder primacy view calls for increasing shareholder rights to enhance shareholder control over corporate decisions such as CEO dismissals. The director primacy view on the other hand suggests that directors are a powerful authority not just independent from management, but also from shareholder influence. We suggest that the continued calls for shareholder empowerment decrease directors’ authority to discipline an underperforming CEO. We also suggest that outside director ownership can induce accountability in strong corporate boards and maintain the value of authority. We test our theory in a longitudinal study of large U.S. manufacturing firms over 1,138 firm-years and find support for the predictions that directors initiate CEO changes if shareholder influence over board decisions is limited and outside director ownership is high.

Expropriation of Minority Investors in Chinese Listed Firms: The Role of Internal and External Corporate Governance Mechanisms

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: We investigate how ownership structure, board characteristics, and regional differences in law enforcement and stock market development affect the conflict of interest between majority and minority investors in Chinese listed firms. For this purpose, we study related‐party transactions as well as labor redundancy, and classify firms as either state‐ or private‐controlled.Research Findings/Insights: We find that related‐party transactions grow more extensive as the wedge between the controlling shareholder's control rights and cash flow rights increases. Related‐party transactions also rise with voting rights held by the government in state‐controlled firms. Next, the state as controlling shareholder exacerbates labor redundancy. The control rights of the second to tenth largest investors can offset expropriation. Regarding board characteristics, we find that a larger fraction of directors affiliated with the dominant owner enlarges related‐party transactions, while large boards also increase labor redundancy in state‐controlled firms. We find only weak evidence that higher‐quality institutions help to restrain expropriation of minority investors.Theoretical/Academic Implications: In Chinese listed firms, a major conflict of interest arises between majority and minority investors. Also, the state may exercise its control rights to achieve imperative social and political objectives, to the detriment of external investors. Yet, as the stock market valuation and financial performance of state‐controlled firms rise with the fraction of shares held by the state, future research should better delineate the conditions under which state ownership is either detrimental or beneficial to firms. Next, the results indicate that governance mechanisms suggested by conventional agency theory are deficient in Chinese listed firms. Future research could therefore establish more clearly when internal and external governance mechanisms are likely to work, thereby also taking into account the identity of the controlling shareholder.Practitioner/Policy Implications: Investors should be aware that expropriation in Chinese listed firms has specific implications when the state is the controlling owner. Also, at this stage of development, independent directors and external governance mechanisms can hardly protect the best interests of minority investors. Rather, expropriation is counterbalanced when voting rights are concentrated in the hands of other large block holders. Policy makers should work on ownership restructuring, board independence, and institutional quality to better protect minority rights in Chinese listed firms.

Debt Covenants and Cross-Sectional Equity Returns

This paper investigates the impact of debt covenant protection on the cross section of equity returns with a firm-level covenant index and four subindices. We find that firms with weaker covenant protection (lower covenant index levels) earn significantly higher risk-adjusted equity returns than do those firms with greater covenant protection. These results are stronger for covenant indices that are related to investments, subsequent financing, and event risk. The difference between high and low covenant index stocks is more pronounced when agency problems between shareholders and debtholders are more severe, suggesting that the covenant effect arises from an inability to control shareholder risk taking. This paper was accepted by Wei Jiang, finance.