Firm performance when ownership is very concentrated: Evidence from a semiparametric panel

We consider the effect on performance of very large controlling shareholders, who are mostly organized in voting blocks and business groups, in a sample of Belgian listed firms from 1991 to 2006. Since the shape of the relation between ownership and firm value is a controversial issue in corporate finance, we use semiparametric local-linear kernel-based panel models. These models allow us not to impose a priori functional restrictions on the relation between ownership and performance. Our semiparametric analysis shows that the effect on performance varies depending on the size of ownership stakes and that there are departures from linearity, especially in family firms. Our results suggest that this non-linearity in family firms is related to whether or not the CEO is a family member.     

Propping by controlling shareholders,wealth transfer and firm performance: Evidence from Chinese listed companies

Propping acts by controlling shareholders are common in Chinese listed firms. In this paper, we use data on related-party transactions of all listed Chinese firms from 2002 to 2008 to investigate the motivation behind controlling shareholders’ propping acts and subsequent wealth-transfer behavior and how both affect firm performance. We find that such institutional motivators as the maintenance of shell resources and qualification for refinancing have a significant effect on the propping behavior of controlling shareholders of Chinese listed firms and that such behavior is often followed by more serious tunneling when shareholders are driven by these motivators. Compared with non-state-owned firms, state-owned firms with the motivation to qualify for refinancing exhibit more severe tunneling after engaging in propping behavior. We also find that while propping by controlling shareholders improves a firm’s current operating performance, in firms whose controlling shareholders’ are motivated by the desire to maintain shell resources or obtain a refinancing qualification their performance declines in the following year because of subsequent tunneling. The results presented in this paper provide us with a better understanding of the relationship between propping and tunneling, controlling shareholders’ engagement in both and the consequences of that behavior.     

What Are Boards For? Evidence from Closely Held Firms in Colombia

Using a large survey database on the corporate governance practices of privately held Colombian firms, we investigate why firms have boards, and how that choice and the balance of power among the board, controlling shareholders, and minority shareholders affect the trade‐offs between control, liquidity, and growth and, ultimately, firm performance. We find that the probability of having a board increases with the number of shareholders and in family firms. When the preferences of controlling and minority shareholders diverge, as with respect to capital structure and dividend policy, boards support controlling shareholders’ decisions, thereby exacerbating the agency conflict between the two groups of shareholders.     

The implied cost of equity capital,corporate investment and chief executive officer turnover

This study investigates how the cost of equity capital, along with corporate investment, affects chief executive officer (CEO) turnover decisions. We hypothesize that the cost of equity conveys information about firm performance uncertainty that is informative of CEO talent. Consistently, our empirical results show that the likelihood of CEO turnover is positively associated with the implied cost of equity, after controlling for earnings and stock performance measures and risk factors. Additional analysis of reverse causality supports the causal effect of the high cost of equity on CEO dismissals. We also find that the positive association is more pronounced for firms that are more likely to suffer from underinvestment problems. These results suggest that the cost of equity plays a more important role in assessing CEO performance when the firm needs more external equity capital to pursue investment opportunities.     

Entrenched controlling shareholders and the performance consequences of corporate diversification in Taiwan

The main purpose of this paper is to examine the value/performance effects of corporate diversification in an emerging market. Prior evidence on this issue is still mixed. The present study adds the role of entrenched controlling shareholders into this issue. We argue that when controlling shareholders have larger excess board seats control rights, they have higher ability and incentive to expropriate minority shareholders through corporate diversification. Using a sample of firms listed on the Taiwan Stock Exchange in 2003, we find that controlling shareholders’ excess board seats control is negatively associated with the market valuation of corporate diversification. Consistently, we also document that highly diversified firms run by more entrenched controlling shareholders have lower future financial performance than otherwise similar firms. Overall, our findings imply that corporate diversification is not necessarily harmful or beneficial for firms. We conclude that the agency problem arising from the excess board seats control rights owned by controlling shareholders is an influential factor leading to negative performance consequences with regard to firm diversification.     

Does tunneling explain the sensitivity of executive compensation to other member firms’ performance?

This study examines how executive compensation is set when a firm is a business group member. Using Korea's unique setting of family-controlled business groups, we find that a member firm's executive cash compensation is positively linked to the stock performance of other member firms as well as its own. Further analyses reveal that this positive link is consistent with the hypothesis that corporate managers are rewarded for their decision to benefit the controlling family at the expense of the firm they manage. Specifically, we find that the sensitivity of executive pay to other member firms’ performance exists only in respect to firms in which the cash flow rights of the controlling family exceed those of the subject firm. We also find that this sensitivity is strengthened if the controlling family's control–ownership disparity in the subject firm is above the sample median.     

Is Bancassurance a Viable Model for Financial Firms?

The bancassurance (i.e., bank and insurance company combinations) model for financial firm architecture has been widely used in Europe and recently has been adopted by U.S. financial firms. We provide evidence regarding the viability of bancassurance combinations for U.S. and non‐U.S. mergers between 1997 and 2002. We find positive gains and no significant risk shifts for shareholders of bidding firms, and that higher CEO stock ownership results in less positive gains for shareholders. These and other results suggest that bancassurance firms are viable entities that may play an important role in the future evolution of the U.S. financial system.     

Governance with multiple objectives: Evidence from top executive turnover in China

We examine the relationship between Chief Executive Officer (CEO) turnover and the performance of listed Chinese firms and obtain two results. First, we find a negative relationship between the level of pre-turnover profitability and CEO turnover when firms are incurring financial losses, but no such relationship when they are making profits. Second, there is an improvement in post-turnover profitability in loss-making firms, but no such improvement in profit-making firms. These results indicate the existence of a time-varying objective function, whereby shareholders have a greater incentive to discipline their CEOs on the basis of financial performance when their firms are incurring financial losses rather than profits.     

Disproportional ownership structure and pay–performance relationship: Evidence from China's listed firms

This paper examines the impact of ownership structure on executive compensation in China's listed firms. We find that the cash flow rights of ultimate controlling shareholders have a positive effect on the pay–performance relationship, while a divergence between control rights and cash flow rights has a significantly negative effect on the pay–performance relationship. We divide our sample based on ultimate controlling shareholders' type into state owned enterprises (SOE), state assets management bureaus (SAMB), and privately controlled firms. We find that in SOE controlled firms cash flow rights have a significant impact on accounting based pay–performance relationship. In privately controlled firms, cash flow rights affect the market based pay–performance relationship. In SAMB controlled firms, CEO pay bears no relationship with either accounting or market based performance. The evidence suggests that CEO pay is inefficient in firms where the state is the controlling shareholder because it is insensitive to market based performance but consistent with the efforts of controlling shareholders to maximize their private benefit.     

CEO turnover in China: the role of market-based and accounting performance measures

We investigate the relationship between chief executive officer (CEO) turnover and firm performance in China's publicly traded firms. We provide evidence on the use of accounting and market-based performance measures in CEO turnover decision. We also investigate the moderating roles of noise in performance measures, firm growth opportunities, state-owned enterprises, and corporate governance reform on the weights attached to these performance measures. We observe that Chinese listed firms rely more on accounting performance than on stock market performance when determining CEO turnover. Firms with noisier performance measures and larger growth opportunities rely less on both accounting performance and stock market performance in CEO replacement decision. State-controlled firms are more likely to use accounting performance to determine CEO turnover. Finally, we observe that the weight attached to the accounting performance measure is significantly reduced and the weight attached to the stock market performance measure is significantly increased after the governance reform. We also observe that the reform has different impact on state-owned firms and private firms in terms of the sensitivity of CEO turnover to firm performance.     

Managerial succession and firm performance

We examine CEO turnover and firm financial performance. Accounting measures of performance relative to other firms deteriorate prior to CEO turnover and improve thereafter. The degree of improvement is positively related to the level of institutional shareholdings, the presence of an outsider-dominated board, and the appointment of an outsider (rather than an insider) CEO. Turnover announcements are associated with significantly positive average abnormal stock returns, which are in turn significantly positively related to subsequent changes in accounting measures of performance. This suggests that investors view turnover announcements as good news presaging performance improvements.     

Do corporate governance mechanisms influence CEO compensation? An empirical investigation of UK companies

The aim of this paper is to empirically examine the influence of corporate governance mechanisms, that is, ownership and board structure of companies, on the level of CEO compensation for a sample of 414 large UK companies for the fiscal year 2003/2004. The results show that measures of board and ownership structures explain a significant amount of cross-sectional variation in the total CEO compensation, which is the sum of cash and equity-based compensation, after controlling other firm characteristics. We find that firms with larger board size and a higher proportion of non-executive directors on their boards pay their CEOs higher compensation, suggesting that non-executive directors are not more efficient in monitoring than executive directors. We also find that institutional ownership and block-holder ownership have a significant and negative impact on CEO compensation. Our results are consistent with the existence of active monitoring by block-holders and institutional shareholders. Finally, the results show that CEO compensation is lower when the directors’ ownership is higher.     

Capital Structure, CEO Dominance, and Corporate Performance

We use agency theory to investigate the influence of CEO dominance on variation in capital structure. Due to agency conflicts, managers may not always adopt leverage choices that maximize shareholders’ value. Consistent with the prediction of agency theory, the evidence reveals that, when the CEO plays a more dominant role among top executives, the firm adopts significantly lower leverage, probably to evade the disciplinary mechanisms associated with debt financing. Our results are important as they demonstrate that CEO power matters to critical corporate outcomes such as capital structure decisions. In addition, we find that the impact of changes in capital structure on firm performance is more negative for firms with more powerful CEOs. Overall, the results are in agreement with prior literature, suggesting that strong CEO dominance appears to exacerbate agency costs and is thus detrimental to firm value.     

Commitment or entrenchment?: Controlling shareholders and board composition

This paper examines the determinants of board composition and firm valuation as a function of board composition in Taiwan – a country that features relatively weak protection for investors, firms with controlling shareholders, and pyramidal groups. The results suggest that there is poor governance when the board is dominated by members who are affiliated with the controlling family but good governance when the board is dominated by members who are not affiliated with the controlling family. In particular board affiliation is higher when negative entrenchment effects – measured by (1) divergence in control and cash flow rights, (2) family control, and (3) same CEO and Chairman – are strong and lower when positive incentive effects, measured by cash flow rights, are strong. Moreover, relative firm value is negatively related to board affiliation in family-controlled firms. Thus, the proportion of directors represented by a controlling family appears to be a reasonable proxy for the quality of corporate governance at the firm level when investor protection is relatively weak and it is difficult to determine the degree of separation between ownership and control.     

CEO Turnover and Retention Light: Retaining Former CEOs on the Board

Prior CEO turnover literature characterizes the board's decision as a choice between retaining versus replacing the CEO. We focus instead on the CEO's decision rights and introduce a third option in which the incumbent CEO is removed but retained on the board for an extended period, which we call Retention Light. Firms may benefit from Retention Light because former CEOs possess unique monitoring and advising abilities, but the former CEO could also exploit available decision rights for personal benefit. A Retention Light CEO's decision rights generally exceed those of CEOs who exit the firm entirely but fall short of the rights of a retained CEO. We find that when prior firm performance is better, the former CEO is more likely to be retained on the board (Retention Light) than to exit the firm. However, this relation is weaker when the CEO reaches normal retirement age at which time CEO power becomes more important. We also provide evidence on how the nature of the CEO's bargaining power varies with his personal attributes and board characteristics in its influence on the Retention Light decision. Retention Light firms are more likely than CEO‐exit firms to select a successor CEO with relatively weaker bargaining power. Finally, Retention Light involving a nonfounder CEO is negatively associated with the firm's postturnover financial performance. Overall, Retention Light is a distinct CEO turnover option that has important consequences for board decisions and firm performance.     

Dividend payouts and catering to demands: Evidence from a dividend tax reform

Utilizing the 2012 dividend tax reform in China, this paper examines how firms make dividend payout decisions that cater to the controlling shareholders' demand, especially when controlling shareholders and outside minority shareholders have different dividend preferences. We find that firms increase dividend payouts when controlling shareholders demand higher dividends after the dividend tax reform. In particular, firms pay higher dividends when facing increased demand from controlling shareholders than when the demand is from minority investors. In addition, we find that firms that increase dividend payments due to the controlling shareholders' demand subsequently have more debt financing and poorer firm performance, suggesting that catering to the demands from controlling shareholders is subject to the Type II agency problem.     

Firm Characteristics,Shareholder Sophistication and the Incidence of a ‘First Strike’ Under the ‘Two Strikes’ Rule in Australia

To restrain ‘excessive’ executive pay, Australia introduced new legislation in 2011, commonly known as the ‘two strikes’ rule. This rule has predictable consequences for publicly listed firms and their directors. In this study, we investigate which firm characteristics are associated with the incidence of a ‘first strike’ under the two strikes rule. We find that the incidence of a first strike is positively associated with higher levels of CEO pay, lower ownership concentration, smaller firm size, higher level of institutional ownership and CEO duality. Additional analysis suggests that shareholders fail to differentiate between CEO pay, which is related to the economic characteristics of a firm, and the pay that is not related to firm characteristics. This finding suggests that, unlike US shareholders, Australian shareholders do not appear to have a sophisticated understanding of CEO pay structure.     

Us knows us in the UK: On director networks and CEO compensation

We analyze the relation between CEO compensation and networks of executive and non-executive directors for all listed UK companies over the period 1996-2007. We examine whether networks are built for reasons of information gathering or for the accumulation of managerial influence. Both indirect networks (enabling directors to collect information) and direct networks (leading to more managerial influence) enable the CEO to obtain higher compensation. Direct networks can harm the efficiency of the remuneration contracting in the sense that the performance sensitivity of compensation is then lower. We find that in companies with strong networks and hence busy boards the directors' monitoring effectiveness is reduced which leads to higher and less performance-sensitive CEO compensation. Our results suggest that it is important to have the ‘right’ type of network: some networks enable a firm to access valuable information whereas others can lead to strong managerial influence that may come at the detriment of the firm and its shareholders. We confirm that there are marked conflicts of interest when a CEO increases his influence by being a member of board committees (such as the remuneration committee) as we observe that his or her compensation is then significantly higher. We also find that hiring remuneration consultants with sizeable client networks also leads to higher CEO compensation especially for larger firms.     

Family ties,board compensation and firm performance

This study examines the effect of corporate boards with family ties on board compensation and firm performance. Family firms dominate the vast majority of enterprise forms around the world. Despite possible agency problems between large and small shareholders, family boards may contribute specific knowledge and competitive advantage to the firm. This paper shows that the excess board compensation of firms with a non-family CEO is positively related to the percentage of board members with family ties, but the presence of family boards cannot justify the outcome of firm performance, suggesting a negative entrenchment of firms with a non-family CEO. By contrast, the excess board compensation of firms with a family CEO is found to be unrelated to the percentage of board members with family ties, and the presence of family boards is positively associated with firm performance, suggesting the convergence-of-interests of firms with a family CEO.     

CEO incentive compensation in U.S. financial institutions

This paper empirically addresses the questions of whether and, if yes, how U.S. bankers are compensated in particular with regard to incentive pay. Although the level of bank CEO pay has dropped during the financial crisis period, bank CEOs fared much better in comparison to their firms (and, in turn, their shareholders). Furthermore, bank CEO incentive pay beyond the justifiable portion is positively associated with CEO power measures. There is also some evidence, albeit weaker, that CEO power is positively related to CEO incentive pay switches.