The effect of merger anticipation on bidder and target firm announcement period returns

This paper examines investors' anticipation of bidder and target merger candidacy and if investor anticipations about candidacy affect the distribution of value between bidder and target firm shareholders. We find that bidder firms can be predicted more accurately than target firms. To investigate how merger announcement period returns are distributed among bidder and target shareholders, we control for different degrees of predictability in bidder and target selection and find that the difference between bidder and target firm three-day cumulative abnormal returns around a merger announcement decreases significantly. Thus, the evidence supports the hypothesis that the asymmetry in investor anticipations about merger candidacy causes disparity in bidder and target firm announcement period abnormal returns.     

The impact of ownership transferability on family firm governance and performance: The case of family trusts

Ownership structure plays a critical role in the incentives and behaviors of business organizations. The literature has focused on the effects of firm ownership dispersion across managers and investors. We extend the literature by examining the roles of ownership structure within a controlling family. Specifically, we focus on the family trust structure, which is a popular vehicle for holding family ownership around the world. The trust structure typically locks controlling ownership within a family for a very long period. Although it ensures family control, the share transfer restriction may induce family shirking problems, make family conflicts difficult to resolve, and distort firm decisions. Based on a sample of publicly traded family firms in Hong Kong, we report that trust-controlled firms that are more susceptible to these problems tend to pay higher dividends, invest less in the long term, and experience worse performance. The costs of using a trust structure are more significant when the family stakes have been locked inside the trust for a longer period and when a larger amount of family ownership is held by the trust.     

Institutional ownership stability and BHC performance

In this study, the association between performance of BHCs and institutional ownership stability is investigated and contrasted to those found for the less regulated utility and industrial firms in order to determine whether regulation displaces owner monitoring. We employ a simultaneous equations model treating firm performance and institutional ownership stability as endogenous variables. Several results are obtained. First, BHC performance is positively associated with institutional ownership stability. Second, this association is weaker for BHCs than for comparable utility and industrial firms, possibly because of the substitution of regulation for owner monitoring in banking. Third, this association is stronger in the recent deregulated years and for BHCs with lower likelihood of regulatory intervention.     

Public pension fund ownership and firm performance

Equity ownership by public pension funds (PPFs) is widely used in the literature (see, e.g., Cremers and Nair 2005; Dittmar and Mahrt-Smith 2007) as a measure of the strength of shareholder monitoring/governance. This paper raises caution on such practices by illustrating an inverted-U shape relationship between PPF ownership and firms’ future performance, measured by stock returns and operating performance: during 1985–2005, future performance first increases, then declines in aggregate equity ownership by PPFs. Our results suggest that PPFs’ presence is consistent with shareholder value maximization when they have moderate influence on firm management, whereas excessive PPF ownership may facilitate PPF managers’ pursuits of political interests and destroy shareholder value. Therefore, it is important to impose an upper bound to PPF ownership when measuring the strength of shareholder monitoring/governance.     

The effect of ownership structure on firm performance: Additional evidence

This article examines the effect of ownership structure on corporate performance, using stock returns as a measure of performance. Based on the 1988–1992 sample period, we find that the level of insider ownership is positively related to stock returns. This result suggests that as managers' equity ownership increases, their interests coincide more with those of outside shareholders. But we also find that the square of the level of insider ownership is inversely related to stock returns, indicating that excessive insider ownership rather hurts corporate performance probably due to the problem associated with managers' entrenchment. Finally, we find that stock returns are positively related to institutional ownership, indicating that institutional owners are active in monitoring management.     

Distribution of institutional ownership and corporate firm performance

We investigate the association between corporate firm performance and the level and stability of institutional ownership within a simultaneous equation model. Our main ownership stability measures include ownership persistence and the time-lengths over which investors hold non-zero shares or maintain their shareholding. We find that there is a positive relationship between firm performance and institutional ownership stability, accounting for the shareholding proportion. This relationship is robust to the employment of ownership turnover measures used in the literature and consistent with the view that stable institutional investors play an effective role in monitoring. When we disaggregate institutional investors into pressure-insensitive and pressure-sensitive categories, we find that stable shareholding of each group has a positive impact on performance, with the first group exerting a larger effect. The channels of the effect include, but are not limited to, decreased information asymmetry and increased incentive-based compensation.     

Managerial ownership and firm performance: Evidence from China's privatizations

We examine the relationship between managerial ownership and firm performance for a sample of Chinese State-owned enterprises (SOEs) privatized over the period 1992-2000. The results indicate that managerial ownership has a positive effect on firm performance. Although return on assets (ROA) and return on sales (ROS) decline post-privatization, firms with high managerial ownership and, specially, high CEO ownership, exhibit a smaller performance decline. The difference is highly significant, with or without controlling for residual state ownership and changes in the firm's operating environment. We also find that the influence on firm performance becomes less significant at higher levels of CEO ownership. In contrast, performance continues to increase with managerial ownership. This finding suggests that, beyond a certain point, the distribution of shares would be more effective if extended to the whole management team instead of being limited to the chief executive.     

Capital structure,equity ownership and firm performance

This paper investigates the relationship between capital structure, ownership structure and firm performance using a sample of French manufacturing firms. We employ non-parametric data envelopment analysis (DEA) methods to empirically construct the industry’s ‘best practice’ frontier and measure firm efficiency as the distance from that frontier. Using these performance measures we examine if more efficient firms choose more or less debt in their capital structure. We summarize the contrasting effects of efficiency on capital structure in terms of two competing hypotheses: the efficiency-risk and franchise-value hypotheses. Using quantile regressions we test the effect of efficiency on leverage and thus the empirical validity of the two competing hypotheses across different capital structure choices. We also test the direct relationship from leverage to efficiency stipulated by the Jensen and Meckling (1976) agency cost model. Throughout this analysis we consider the role of ownership structure and type on capital structure and firm performance.     

On institutional ownership and firm performance: A disaggregated view

We study the relationship between institutional ownership and firm performance in Finland. A systems approach is employed to investigate the potential two-way causality between firm performance and ownership structure. Three-stage least squares estimation technique is used to solve for the systems. The evidence suggests an endogeneity problem between firm performance and institutional ownership. However, the magnitude of the problem differs with respect to the concentration of ownership measure used. Our results show that a more equal distribution of the voting power among the largest institutional stakeholder may exert positive effects on firm performance. We also find a significant difference relating to firm performances and equity ownerships between the two classes of institutional investor. Consistent with the ownership structure in Finland, we find that a simple ownership concentration index does not influence firm performance.     

Managerial ownership and firm performance: A re-examination using productivity measurement

The role of productivity in firm performance is of fundamental importance to the US economy. Consistent with the corporate finance approach, this paper uses the ownership stake of a firm's managers as an argument in estimating the firm's production function. Accordingly, this paper brings together the corporate finance and productivity literature. Using a large sample of randomly selected manufacturing firms that does not suffer from any survivorship or large firm size biases, we find that managerial ownership changes are positively related to changes in productivity. We also find a higher sensitivity of changes in managerial ownership to changes in productivity for firms who experience greater than the median change in managerial ownership. These results are robust to including lagged estimates of production inputs, year dummies and separate dummies for each firm to control for unobservable firm characteristics. In addition, we find that the stock market rewards firms with increases in firm value when these firms increase their level of productivity.     

Mutual funds’ ownership and firm performance: Evidence from China

Mutual funds have emerged and rapidly developed since 2000 in China. This study tests empirically the impact of mutual funds’ ownership on firm performance in China, using a large sample for the period of 2001–2005. We find that equity ownership by mutual funds has a positive effect on firm performance. The result is robust to several measures of firm performance and various estimations. Our finding supports recent regulatory efforts in China to promote mutual funds as a corporate governance mechanism and suggests that pooling diffuse minority interests of individual shareholders who are prone to free-rider problems via mutual funds is beneficial.     

State ownership and firm performance: Empirical evidence from Chinese listed companies

While the relationship between state ownership and firm performance has been widely researched, the empirical evidence has provided mixed results. This study applies panel data regression techniques to 10,639 firm-year observations of non-financial Chinese listed firms during 2003–2010 to examine the relationship between state ownership and firm performance. The results show that state ownership has a U-shaped relationship with firm performance. The Split Share Structure Reform in 2005–2006 played a positive role in enhancing the relationship between state ownership and firm profitability ratios. Although state ownership decreased significantly after 2006, it remains high in strategically important industry sectors such as the oil, natural gas and mining sector and the publishing, broadcasting and media sector. The findings reveal that a higher level of state ownership is superior to a dispersed ownership structure due to the benefits of government support and political connections. The Split Share Structure Reform made previously non-tradable shares legally tradable, improving corporate governance and reducing the negative effect of non-tradable state shares.     

Family ownership and firm performance: Empirical evidence from Western European corporations

This paper empirically examines how family-controlled firms perform in relation to firms with nonfamily controlling shareholders in Western Europe. The sample consists of 1672 non-financial firms. Active family control is associated with higher profitability compared to nonfamily firms, whereas passive family control does not affect profitability. Active family control continues to outperform nonfamily control in terms of profitability in different legal regimes. Active and passive family control is associated with higher firm valuations, but the premium is mainly due to economies with high shareholder protection. The benefits from family control occur in nonmajority held firms. These results suggest that family control lowers the agency problem between owners and managers, but gives rise to conflicts between the family and minority shareholders when shareholder protection is low and control is high.     

Enterprise risk management and firm performance: The Italian case

This paper investigates whether a relationship exists between the extent of implementation of enterprise risk management (ERM) systems and the performance of Italian listed companies. While many contributions in the literature focus on the determinants of ERM adoption and use one-dimensional feature to proxy for ERM implementation, we detect the consequences of ERM implementation and capture a variety of features to measure the sophistication of the ERM system. The results show that firms with advanced levels of ERM implementation present higher performance, both as financial performance and market evaluation. Additional tests also corroborate the expectation that effective ERM systems lead to higher performance by reducing risk exposure and that reverse causality between ERM and performance is not present in the short term. The study provides a twofold contribution to the ERM literature. First, it introduces new and more complete measures for ERM implementation, concerning not only corporate governance bodies dedicated to risk management, but also the characteristics of the risk assessment process. Moreover, it provides evidence of a positive relationship between ERM implementation and firm performance in an under-investigated context such as Italy.     

Institutional ownership changes and returns around analysts’ earnings forecast release events: Evidence from Taiwan

Traditional data sources do not have institutional holding data on a daily basis. Because of this, most prior empirical studies of institutional herding have focused on quarterly or annual data. The problem, however, with using quarterly or annual data on institutional holdings is that these data may not reveal institutional herding if it occurs over a shorter time interval. For this study, we make use of data from the Taiwan Stock Exchange (TSE). Unlike traditional data sources, the TSE provides daily institutional holdings information. The use of this detailed data allows us to make more interesting analysis and inferences. In this study, we examine the relationship between institutional ownership changes and returns localized around analysts’ earnings forecast release events. Analysis of institutional ownership and return data around the earnings release event allows us to investigate institutional herding and feedback behavior in a different level. Our major results are as follows: (1) there exists a relation between company specific attributes and institutional herding, (2) observed changes in institutional ownership and contemporaneous return are mainly the results of inter-day price impact of herding, (3) institutional investors show evidence of being informed traders in buying but not selling.     

Failed takeovers, methods of payment, and bidder returns

This study documents bidding-firm stock returns upon the announcement of takeover terminations. On average, bidding firms that offer common stock experience a positive abnormal return, and firms that offer cash experience a negative abnormal return. The positive performance is primarily driven by bidders initiating the takeover termination. Commonstock-financed bidders earn a return not significantly different from that earned by cashfinanced bidders when terminations are initiated by the target firm. The results are consistent with the asymmetric information hypothesis, that the decision not to issue common stock conveys favorable information to the market. In addition, bidder returns at takeover termination are positively related to the amount of undistributed cash flow, supporting the free cash flow hypothesis.     

The effect of domestic to foreign ownership change on firm performance in Europe

This paper examines the relationship between ownership change from domestic to foreign and firm performance. Using European private company data for the period of 2008–2014 and the propensity score matching method, we pair 850 companies that experience ownership change with similar companies that do not. Consistent with the managerial discipline hypothesis, the results show that foreign investors acquire larger and less profitable firms and come from bigger, wealthier, and better-governed countries. After matching firms on propensity scores for country, industry, size, return on assets and leverage, we find that, in the short term, ownership change is associated with higher sales growth but lower return on assets (ROA) and profit margin. In the long term, however, ownership change is positively related to operational efficiency (sales per employee and asset turnover). Our results also show that the origin of the acquirer matters for firm performance; the targets acquired by foreign owners from better-governed countries experience better performance improvement compared to targets acquired by foreign owners from countries with weaker governance.     

Institutional ownership and conservatism

Recent research suggesting that shareholders demand conservative financial reporting raises the question: Which shareholders demand conservatism? We find that higher ownership by institutions that are likely to monitor managers is associated with more conservative financial reporting. This positive association is more pronounced among firms with more growth options and higher information asymmetry, where direct monitoring is more difficult and the potential governance benefits of conservatism are greater. Further, lead-lag tests of the direction of causality suggest that ownership by monitoring institutions leads to more conservative reporting, rather than the reverse. Collectively, these results are consistent with monitoring institutions demanding conservatism.     

Government ownership and the performance of government-linked companies: The case of Singapore

In an emerging economy, the alternative to government control is often no governance. We investigate the governance structure of government-linked companies (GLCs) in Singapore under the ownership/control structure of Temasek Holdings, the government holding entity, which typically owns substantial cash flow rights but disproportional control rights and exercises no operational control. We compare the financial and market performance of GLCs with non-GLCs, where each has a different set of governance structure, the key difference being government ownership. We show that Singaporean GLCs have higher valuations and better corporate governance than a control group of non-GLCs. The results hold even when we control for firm specific characteristics such as profitability, leverage, firm size, and foreign ownership.     

The relationship between managerial ownership and firm performance in high R&D firms

Several studies have examined the relationship between managerial ownership and firm performance/value (e.g., [Journal of Financial Economics 20 (1988) 293; Journal of Financial Economics 27 (1990) 595; Journal of Corporate Finance 5 (1999) 79]). Using different samples, these studies provide general support for the argument that increases in managerial ownership create countervailing interest alignment and entrenchment effects, leading to a nonlinear relationship between managerial ownership and firm performance. However, the actual form of this nonlinear relationship differs across the studies.The present paper examines the relationship between managerial ownership and performance for high R&D firms that are listed on the NYSE, AMEX and NASDAQ. We find that Tobin's Q initially declines with managerial ownership, then increases, then declines again and, finally, increases again—a W-shaped relationship. The findings from our study point to the importance of industry effects in the relationship between managerial ownership and firm performance.