Ownership and Performance in a Lightly Regulated Environment

This article examines the relation between ownership and performance for New Zealand electricity lines firms over the period 1998 to 2006. The sample is of interest because it represents all firms within a single product industry (local electricity distribution), which is a natural monopoly subject to a light‐handed regulatory regime. Thus we are able to examine the theories of ownership on performance, while controlling for regulation, industry, product market competition, accounting methods and other factors that might impact profitability, such as network reliability and network density. The results suggest that listed firms have similar profitability to council‐owned firms and both listed and council‐owned firms outperform trust‐owned firms. The likely reason for the poorer performance of trust‐owned firms is that they have different agency costs than listed and council‐owned firms and the trustees have lower responsibility than directors. Hence, they have lower incentives to be profitable.     

Demutualization and Public Offerings of Financial Exchanges

The recent merger of the New York Stock Exchange with Archipelago, a publicly listed electronic exchange, can be viewed as the final phase of a wave of organizational transformation that has swept across most of the world's major financial exchanges in the last ten years. Until the early 1990s, almost all stock and derivatives exchanges were organized as non‐profit, mutual organizations owned by their members. But starting with the demutualization of the Stockholm Stock Exchange in 1993, the number of stock exchanges that have adopted a for‐profit, publicly listed organizational form has grown steadily. At the same time, the largest derivative exchanges such as the Chicago Mercantile Exchange, the London International Financial Futures and Options Exchange, the Chicago Board of Trade, and Eurex are either already publicly listed or are part of publicly listed parent companies. In this article, after discussing the forces that are driving such change, the authors offer some early evidence on the profitability and stock market performance of listed exchanges. As the authors note, deregulation together with new developments in information technology have caused latent conflicts of interest within the mutual form of organization to become debilitating ones. And, as if to confirm the superiority of the new organizational form, the authors report that conversions to for‐profit status and public ownership have led to significant increases in operating performance and share values. But, as the authors also note, these results are preliminary, and the demutualization and listing of exchanges creates a new challenge for exchanges as self‐regulating institutions: managing the conflicts that may arise between the owners and those who transact on the exchange. The authors expect the next wave of transformation to produce both geographical consolidation as well as mergers/acquisitions across product lines (e.g. merger of leading equities and derivatives exchanges). In equities trading, given that North America is already dominated by the NYSE and Nasdaq, the most interesting arena will continue to be Europe, where one or two large exchanges are likely to emerge. The emergence of such megaexchanges, with scale comparable to that of U.S. exchanges, could have a significant impact on the corporate capital‐raising process and cost of capital.     

What Happens During the Private Period?: Evidence from Public‐to‐Private Reverse LBOs

This study provides new evidence on the restructuring activities undertaken by public‐to‐private reverse leveraged buyouts (RLBOs) while owned by private equity firms. The authors' comprehensive sample of public‐to‐private LBOs that return to public ownership through IPOs enables them to observe changes in profitability, valuation, financial structure, operating structure, and cost structure from the time the firms go private through (and after) their emergence through (re‐) IPOs. With their exclusive focus on reverse LBOs involving public‐to‐private deals, the authors reach findings that contradict previous conclusions about RLBOs. At the time of the LBO, the target firms in reverse LBOs are more levered than their peers, pay higher dividends, and are more profitable than their peers. At the same time, however, they appear to have lower market valuations before the buyouts. During the private period, the target firms of reverse LBOs achieve significant increases in employee productivity, asset restructuring, and improved gross margins, while operating with substantially higher levels of debt financing, lower levels of cash and working capital, and greater concentration of equity ownership. After the companies return to public ownership through IPOs, such companies continue to operate with higher leverage and ownership concentration than their publicly traded peers while producing further increases in profitability, resulting in substantial increases in both enterprise and equity valuation. The authors' analysis also shows that higher debt levels from the buyout play an important role in increased enterprise values. The evidence suggests that possible undervaluation as well as expected efficiency gains from restructuring actions are the primary motives for such reverse LBOs.     

Corporate Governance and Accounting Conservatism in China

A principal-agent relationship exists among creditors, shareholders and management, and information asymmetry among them leads to asymmetric loss functions, which induces conservative accounting. This paper investigates the determinants of accounting conservatism using accrual-based measures and data from 2001 to 2006 in China. We find that a higher degree of leverage, lower level of control of ultimate shareholders and lower level of management ownership lead to more conservative financial reporting. We also find that political concerns and pressures among state-owned enterprises are greater than those among non-state owned enterprises, which leads to more conservative financial reporting among the former. However, a decrease in such concerns leads to a decrease in accounting conservatism. Overall, we find that among the determinants of conservatism in China, debt is the most important, followed by ownership, and that board has little influence.     

Accounting disclosure and firms' financial attributes: Evidence from the UK stock market

This paper focuses on the disclosure of accounting information in the financial statements of UK firms. The primary objective of the study is to analyse the financial characteristics of firms that provide extensive disclosures, and assess the financial impact of their motives, such as for example the need to raise equity finance. The study examines the financial attributes of firms that disclose information about key accounting issues including risk exposure, changes in accounting policies, use of international financial reporting standards and hedging practices. Firms are inclined to disclose accounting information in order to assure the market participants that their accounting policies are consistent with the accounting regulation and meet the information needs of their stakeholders. The study shows that in order to raise finance in the capital and debt markets, firms tend to provide extensive accounting disclosures. Firms that provide informative accounting disclosures appear to display higher size, growth and leverage measures. The findings also show that the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementation of international financial reporting standards enhances the quality and the comparability of financial statements; hence it promotes consistency and reliability in financial reporting and facilitates companies in raising capital internationally.     

The use of the Internet for corporate reporting in the Mercosur (Southern common market): The Argentina case

This study examines disclosure practices on the websites of companies listed on the Buenos Aires Stock Exchange. We perform content analysis to provide evidence on Internet reporting practices by 84 publicly traded firms. We also identify the characteristics of firms that communicate financial and non-financial information on the Internet. We find that companies in the financial and insurance, services and mining industries disclose more financial and non-financial information on their websites than companies in other industries. The average concentration of ownership is 68%, with 27% of the companies being controlled by foreign groups. Those companies with higher concentration disclose more financial and non financial information than companies with less concentration. Companies in the financial and insurance and service industries, utilize their websites for commercial purposes to facilitate access to customers to their accounts and also to sell services. This e-commerce usage of websites is less developed in other industries. About 71% of companies in the financial and insurance industry are included in the Merval25 index and are audited by Big 4. These companies are both larger in size and less profitable than companies in other industries. We find that profitability and leverage do not have significant effect on corporate Internet reporting practices and that growth has negative effect on corporate Internet reporting practices. We also find that companies in the mining sector provide significantly more disclosure about social responsibility indicating a desire to improve the public image of harming the environment. The results documented, herein, extend the literature on voluntary disclosure of financial and non-financial information using the Internet in emerging markets.     

Ownership structure,risk and performance in the European banking industry

We compare the performance and risk of a sample of 181 large banks from 15 European countries over the 1999–2004 period and evaluate the impact of alternative ownership models, together with the degree of ownership concentration, on their profitability, cost efficiency and risk. Three main results emerge. First, after controlling for bank characteristics, country and time effects, mutual banks and government-owned banks exhibit a lower profitability than privately owned banks, in spite of their lower costs. Second, public sector banks have poorer loan quality and higher insolvency risk than other types of banks while mutual banks have better loan quality and lower asset risk than both private and public sector banks. Finally, while ownership concentration does not significantly affect a bank’s profitability, a higher ownership concentration is associated with better loan quality, lower asset risk and lower insolvency risk. These differences, along with differences in asset composition and funding mix, indicate a different financial intermediation model for the different ownership forms.     

Performance and Policy of Foundation‐owned Firms in Germany

This paper compares performance and policy of foundation‐owned firms and of listed corporations in Germany. Foundations have no owners so that there exist no individuals with financial ownership claims on firms which are wholly owned by foundations. This suggests weaker outside control of foundation‐owned firms implying lower profitability. The empirical findings show a slightly better performance of foundation‐owned firms compared to corporations. Foundation‐owned firms display higher labour intensity, lower labour productivity, and lower salary levels. This policy promotes job security without endangering the viability of foundation‐owned firms.     

Measuring Country Differences in Enforcement of Accounting Standards: An Audit and Enforcement Proxy

In this paper we present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country's accounting standards. The use of a common set of standards such as International Financial Reporting Standards (IFRS) aims, in broad terms, to promote the comparability and transparency of financial statements and to improve the quality of financial reporting. However, the effectiveness of IFRS adoption may be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of outcomes from adopting IFRS use a range of legal system proxies to capture these country differences, but the proxies are deficient in that they seldom focus explicitly on factors that affect how compliance with accounting standards is promoted through external audit and the activities of independent enforcement bodies. To address this deficiency, we calculate measures of the quality of the public company auditors’ working environment (AUDIT) and the degree of accounting enforcement activity (ENFORCE) by independent enforcement bodies. We do this for 51 countries for each of the years 2002, 2005 and 2008, using publicly available data provided by the International Federation of Accountants (IFAC), the World Bank and the national securities regulators. Preliminary tests suggest our indices have additional explanatory power (over more general legal proxies) for country‐level measures of economic and market activity, financial transparency and earnings management. We expect they will prove useful to researchers and other interested parties who require country‐level measures that focus on the degree of enforcement of financial reporting practices.     

The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries

This paper examines the change in the financial and operating performance of 79 companies from 21 developing countries that experienced full or partial privatization during the period from 1980 to 1992. We use accounting performance measures adjusted for market effects in addition to unadjusted accounting performance measures. Both unadjusted and market-adjusted results show significant increases in profitability, operating efficiency, capital investment spending, output, employment level, and dividends. We also find a decline in leverage following privatization but this change is significant only for unadjusted leverage ratios. Our results are generally robust when we partition our data into various subsamples.     

Assessing the Impact of Fair‐Value Accounting on Financial Statement Analysis: A Data Envelopment Analysis Approach

The historical‐cost and prudence principles have guided accounting for financial investments and tangible fixed assets in many jurisdictions around the globe. This situation might change as a consequence of the increasing number of countries adopting International Financial Reporting Standards (IFRS), which, to some extent, permit accounting on a fair‐value basis. It is unclear how such a change would affect the analysis of financial statements and to what extent it could modify analysts' perceptions of companies' condition and performance. This paper attempts to shed some light on this issue by restating the financial investments and tangible fixed assets of a sample of 85 Spanish insurance companies, applying fair value instead of historical‐cost‐based valuations and by simulating analyst perception of these companies' efficiency and profitability for both sets of data using data envelopment analysis (DEA). We find that the numbers on the face of the financial statements change considerably and observe that the magnitude of these changes varies between companies and classes of assets. However, only in a few cases does a change in the valuation basis lead to a relevant change in DEA scores; within our sample, the overall assessment of companies with regard to efficiency and profitability remains largely the same under both valuation bases. These findings seem to indicate that a change from historical‐cost to fair‐value accounting could alter analyst perceptions of a limited number of companies but likely will not have a major impact on the appraisal of the majority of them.     

Blockholders Are More Common in the United States Than You Might Think*

Finance scholars have long characterized the large publicly traded U.S. company as having a fragmented ownership structure with a diffuse shareholder base—significantly more diffuse than comparable companies in most other countries. But the findings of the author's recent study, which incluudes large amounts of “hand-collected data” on the share ownership of U.S. companies, are strikingly at odds with this characterization. As reporteed in the study, 96% of a sample of 375 randomly chosen, publicly traded U.S. corporations—including companies like American Express and McDonald's—had at least one shareholder who owned at least 5% of the firm's common stock. In fact, such blockholders as a group owned almost 40% of the typical U.S. company. There was, to be sure, an inverse relation between ownership concentration and firm size, but ownership was unexpectedly concentrated even among the largest companies, with 89% of the S&P 500 companies in the sample having at least one 5% blockholder. What's more, the ownership concentration of U.S. public companies turned out to be remarkably similar to the average ownership concentration of large samples of listed companies from 22 European and East Asian countries. More specifically, the ownership structure of U.S. companies—after controlling for differences in company size—appears to all in the middle of the distribution of those countries, whether one looks at the proportion of companies with block-holders or the blockholders' average percentage holdings.     

The return to retail and the performance of US banks

The US banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This paper examines the impact of banks’ retail intensity on performance from 1997 to 2004 by developing three complementary definitions of retail intensity (retail loan share, retail deposit share, and branches per dollar of assets) and comparing these measures with both equity market and accounting measures of performance. We find that an increased focus on retail banking across US banks is linked with significantly lower equity market and accounting returns for all banks, but lower volatility for only the largest banking companies. We conclude that retail banking may be a relatively stable activity, but it is also a low return one.     

The Composition and Effectiveness of Audit Committees in the Presence of Large Controlling Shareholders

The authors' study of audit committees in 450 large East Asian companies (150 each in Hong Kong, Singapore, and Malaysia) finds a strong positive correlation between the “cash flow” ownership (as opposed to just the voting rights) of large shareholders and the percentage of independent audit committee members. The study also reports a strong positive correlation between the “cash flow” ownership of large shareholders and the percentage of audit committee members with financial expertise and experience. This finding is consistent with the hypothesis that larger cash flow ownership provides large shareholders with strong incentives for more effective governance. Conversely, the lower percentages of independent or professional audit directors at companies with large disparities between cash ownership and voting rights is consistent with the authors' hypothesis that entrenched large shareholders prefer inferior governance structures that pose fewer obstacles to their tendency to exploit the wealth of minority shareholders. Furthermore, the authors find higher valuations (market‐to‐book ratios) for companies with audit committees that consist entirely of independent directors and have larger percentage of members with financial expertise. And when viewed as a whole, the authors' findings provide support for the argument that ownership structure affects the composition of audit committees, and that independent and professional audit committees can help increase firm value.     

Insider ownership, ownership concentration and investment performance: An international comparison

This article makes two important contributions to the literature on the incentive effects of insider ownership. First, it presents a clean method for separating the positive wealth effect of insider ownership from the negative entrenchment effect, which can be applied to samples of companies from the US and any other country. Second, it measures the effects of insider ownership using a measure of firm performance, namely a marginal q, which ensures that the causal relationship estimated runs from ownership to performance. The article applies this method to a large sample of publicly listed firms from the Anglo-Saxon and Civil law traditions and confirms that managerial entrenchment has an unambiguous negative effect on firm performance as measured by both Tobin's (average) q and our marginal q, and that the wealth effect of insider ownership is unambiguously positive for both measures. We also test for the effects of ownership concentration for other categories of owners and find that while institutional ownership improves the performance in the USA, financial institutions have a negative impact in other Anglo-Saxon countries and in Europe.     

Institutional Ownership,Diversification, and Riskiness of Bank Holding Companies

We examine the relationship among the level and stability of institutional ownership, diversification, and riskiness of publicly traded bank holding companies. We find that large and stable institutional ownership is associated with a higher (lower) level of geographic, revenue, and nontraditional banking (asset) diversification and lower risk, suggesting that institutional investors are prudent and favor risk‐reducing diversification strategies. The association between institutional ownership level and diversification is more pronounced under deregulation and during the crisis, suggesting a substitution effect between regulation and market discipline, and a greater level of monitoring and/or advising by institutional investors during the crisis, respectively.     

Do powerful chief executives influence the financial performance of UK firms?

Drawing on a framework from agency theory, we examine the relation between the decision-making power of Chief Executive Officers (CEOs) and the financial performance of 468 United Kingdom (UK) publicly listed companies (plcs) using a dynamic panel data estimation method for the six years 2003–2008. We measure CEO power using a ‘power index’ which captures the extent to which the autonomy of the CEO to make unilateral decisions could influence firms' financial performance. To test for robustness, our analysis is conducted using different measures of financial performance. Our results reveal that, consistent with previous UK research, CEO power, as defined by CEO-Chair duality, CEO-tenure and CEO share ownership, is negatively related to financial performance. We also find that concentrated ownership is inversely related to the performance of UK plcs. CEO's compensation and board structure, however, do not appear to be related to the financial performance of the UK plcs.     

The impact of national GAAP and accounting traditions on IFRS policy selection: Evidence from Germany and the UK

The adoption of IFRS in the European Union in 2005 aimed to increase the comparability of publicly traded companies’ consolidated accounts. However, previous literature questions whether IFRS are applied consistently across countries with differing institutional environments, and therefore, whether de facto harmony has been achieved. We further examine this question by investigating IFRS accounting policy choices of listed companies in Germany and the UK between 2005 and 2009. We find that most firms, when choosing IFRS options, tend to retain accounting policies required by national rules. We also investigate national accounting traditions in the case of options under national GAAP and find that most companies continue these after adopting IFRS. Moreover, there appears to be little significant change in accounting choices over time from 2005 to 2009. Given the differences in accounting rules and practices that exist across countries, our results suggest that international differences in financial reporting are likely to continue under IFRS.     

Timeliness of corporate and audit reports: Some empirical evidence in the French context

The issue of timeliness of financial reporting, an important qualitative characteristic of accounting information, has received much attention from regulatory and professional bodies in France in recent years. The increasing presence of international investors, particularly from the US, on the Paris Stock Exchange adds to the importance of this issue. The timeliness of corporate and audit reports in the French context is analyzed by examining the trend in reporting delay of companies, the effect that qualified reports have on the timeliness of corporate reporting, and the relationship between reporting behavior and types of audit reports over a 10-year period. The data are taken from more than 5000 annual reports of French publicly held companies for the years 1986-1995. These bear witness to an improvement in timeliness of corporate and audit reports. This improvement is greater for reports from consolidated accounts of groups than those from annual accounts of companies. There is also evidence that qualified audit opinions were released later than unqualified opinions and that, in general, the more serious the qualification, the greater the delay.