Empirical studies on ownership and performance: MNO

Table: Empirical studies on ownership structure and performance [1]

Introduction: Want to find the empirical study by Demsetz and Lehn [1985]? Just click D below and move down alphabetically on the resulting web page. Note that this page is updated when new papers emerge. Also, a few studies have blank cells. This is temporary. They will eventually be completed.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Author(s)

&Journal

Sample & Period[2]

Ownership

variables(s)[3] [4]

Performance variable(s)

Other variable(s): Controls & dependents[5]

Statistical methods

Main results

Preferred explanation

Madden [1982], Journal of Economics and Business

No difference in performance.

Malatesta and Walkling [1988], Journal of Financial Economics

113 US firms announcing that poison pill securities had been or would be adopted.

1982-86.

% insider ownership by managers and directors.

Two-days' cumulative abnormal return, CAR, by the firm over the interval (AD-1, AD0) where AD is the announcement date.

None.

Event-study. Standard t-test for differences in means between two industry-paired samples.

The adoption of poison pill securities significantly reduces shareholder wealth. Abandoning them significantly increases shareholder wealth. Firms with poison pills have significantly less managerial ownership and are more subject to takeover attempts than firms in the same industries without poison pills.

The entrenchment argument. Note that managers can entrench themselves using poison pills instead of stock ownership.

McConnell and Servaes [1990], Journal of Financial Economics

1.173 firms in 1976 and 1.093 firms in 1986. US firms listed on NYSE or AMEX.

1976 & 1986.

1) Insider stock ownership by managers and directors. 2) Institutional ownership. 3) Blockholders as combined ownership by non-insiders who have more than 5% ownership. 4) Largest single blockholder. 5) Dummy for presence of blockholders. 6) Insiders plus all blockholders. 7) Insider ownership in the ranges: [0-5%], [5-25%], and [25-100%]. 8) Insiders plus all blockholders in the ranges: [0-5%], [5-25%], and [25-100%]. Data from Value Line.

1) Tobin’s Q by market value of stock, preferred stock and debt to replacement value of assets. 2) Return on assets by earnings before depreciation, interest and taxes divided by replacement value of assets.

1) For a limited set of tests industry has been accounted for by subtracting average industry differences in Tobin’s Q from each observation of Tobin’s Q. 2) Size by replacement cost of assets. 3) R&D costs to size. 4) Advertising to size. 5) Long-term debt to size.

OLS regression. Test for roof-shaped relation by including the squared insider ownership (or insiders plus all blockholders) and by using piecewise linear regression.

Both measures of profitability is significantly increasing with ownership by managers and directors, and this relation is significantly roof-shaped with a performance peek for 69% ownership in 1976 and 41% in 1986. Defining ownership as insiders plus all blockholders produce similar results.

Performance increases significantly with institutional ownership, but no measure of blockholder ownership seems to have any effect. All control variables are significant.

Using piecewise linear regression profitability is significantly increasing for insider [or insider plus all blockholders] ownership in the [0-5%] range.

Stulz’s [1988] combined takeover premium and entrenchment argument is used with regard to insider ownership, and Pound’s [1988] efficient-monitoring argument is used with regard to institutional ownership and blockholder ownership.

McConnell and Servaes [1995], Journal of Financial Economics

990 firms in 1976, 876 firms in 1986, and 780 firms in 1988. US firms listed on NYSE or AMEX.

1976 & 1986 & 1988.

1) Insider stock ownership by managers and directors. 2) Institutional ownership. 3) Blockholders as combined ownership by non-insiders who have more than 5% ownership.

1976 and 1986 sample from Value Line Investment Survey. 1988 sample from Disclosure

Tobin’s Q by market value of stock, preferred stock and debt to replacement value of assets.

As Morck, Shleifer and Vishny [1988] but not including industry.

1) Size by replacement cost of assets or book value of assets or market value of firm. 2) R&D costs to size. 3) Advertising to size. 4) Leverage by long-term debt to size. 5) Growth opportunities by price / earnings or sales growth forecasts or five-year historical growth rate or Tobin’s Q.

OLS regression. Test for roof-shaped relation by including the squared insider ownership. The sample is classified in order to control for growth opportunities.

Using the new 1988 sample reproduces the results from McConnell and Servaes [1990]. Only difference is that Tobin’s Q now is significantly increasing with blockholder ownership. For all sample periods the relation between Tobin’s Q and all ownership variables is insignificant for high-growth firms and significantly positive and roof-shaped for low-growth firms. Significant controls: Q increases with leverage in low-growth firms and decreases for high-growth firms.

McEachern [1975], book

48 large US firms. 16 in drugs, 16 in chemicals, and 16 in petroleum refining. 1963-72.

MC £4%.

OM ³4% and management representation.

EC ³4% and no management representation.

Return on stocks calculated as average price increases from 1963 to 72 assuming dividends are reinvested.

Industry type by major product.

OLS regression.

OM and EC firms are significantly more profitable (weak) than MC firms. Industry type is significant as well. Also interested in remuneration.

The incentive alignment argument both with regard to OM and EC firms.

Mehran [1995], Journal of Financial Economics

153 large and small industrial US firms.

1979-80.

1) % of shares and stock options held by CEOs and their immediate families. 2) % of shares held by all officers and directors. 3) % of shares held by outside directors. 4) % of shares held by all outside 5% blockholders. 5) Various definitions of outside blockholders

1) Tobin’s Q by market value of all firm securities to replacement costs of all tangible assets. 2) Return on assets.

1) % of CEO compensation that is equity-based. 2) % of outside directors. 3) Size by log of sales. 4) R&D to sales. 5) Inventory, gross plant and equipment to total assets. 6) Leverage by long-term debt to total assets. 7) Standard deviation of the % change in operating income.

OLS regression. Test for heteroskedasticity, but finds none.

Both performance measures increase significantly with CEO ownership. No significant effect of ownership by all officers and directors or ownership by outside directors. Blockholder ownership is not significant in any sence.

Significant controls: 1) % of CEO compensation that is equity-based. 2) R&D to sales. 3) Size.

The incentive alignment argument.

Mikkelson and Partch [1989], Journal of Financial Economics

Find that the likelihood of a successful acquisition is unrelated to managerial shareholdings. It covers that lower managerial shareholding increase the likelihood of receiving a takeover offer but decreases the likelihood that it will succeed.

Mikkelson, and Partch [1997], Journal of Financial Economics

Insider ownership by officers and directors.

Find no significant decline in operating performance of firms that go public. Insider ownership falls from 68% to 18% after 10 years of the IPO.

The incentive alignment argument.

Mikkelson and Ruback [1985], Journal of Financial Economics

Presence of large-block equity holder or not.

Abnormal returns

Event study

Significant and positive performance on announcement of outsider’s acquisition of a large equity position, but only persistent if takeover or other corporate restructure follows.

The incentive argument.

Mikkelson and Ruback [1991], RAND Journal of Economics

111 blockholder investment and targeted stock repurchases.

1978-83.

Cumulative abnormal return, CAR, by the repurchasing firm over the intervals (A-1, A0) and (R-1, R0) where A is the date of the 5% block acquisition and R is the date of the targeted repurchase.

Look at targeted repurchases from the time of block investment. At that initial stage stock prices rises significantly whereas they fall significantly at the time of repurchase. For the entire period it increased significantly.

Monsen et al [1968], Quarterly Journal of Economics

72 firms of the 500 largest US industrial firms.

1952-63.

MC £5% single block of voting control.

OC ³10% and evidence of active control, or, ³20%.

Return on equity. Observed 1952-63.

1) Industry type by major product. 2) Size of firm by sales. 3) Time.

Variance analysis and a balanced fixed model of three-way analysis of covariance with one concomitant variable.

OC firms are significantly (strong) more profitable than MC firms. Time and industry type are also significant. Size is not.

The incentive alignment argument.

Morck, Shleifer and Vishny [1988a], Journal of Financial Economics

371 of the largest US firms (Fortune 500).

1980.

1) Combined shareholding by all members of the board in the ranges: [0-5%], [5-25%], and [25-100%].

2) Combined shareholding by top two officers.

3) Dummy for presence of founder on board.

Data from Corporate Data Exchange

1) Tobin’s Q by market value of stock, preferred stock and debt to replacement cost of plant and inventories. 2) Profit rate by net cash flow to replacement cost of capital.

1) Size by replacement cost of assets. 2) R&D costs to size. 3) Advertising to size. 4) Long-term debt to size. 5) Industry by three-digit SIC.

OLS regression. Use piecewise linear regression.

Profitability is significantly increasing for board ownership in the [0-5%] range and significantly decreasing in the [5-25%] range and if the founder is present on the board of old firms. Significant controls: R&D to size and debt to size. Similar results for top two officers.

The incentive argument coupled with an entrenchment argument.

Morck, Shleifer, and Vishny [1988b], Paper in a book.

Find a positive relation between managerial shareholding and the probability of acquition.

Murali and Welch [1989], Journal of Business Finance and Accounting

43 closely held and 83 widely held industry matched US firms.

1977-81.

Closely held firms- > 50% by small group or individual.

Widely held firms- All other firms.

Data from Value Line.

1) Adjusted stock market return. 2) Return on assets. 3) Return on equity.

1) Size by assets or equity. 2) Capital expenditures to sales. 3) Advertising expenditures to sales. 4) R&D to sales. 5) Standard variation of return on assets and equity.

OLS regression on performance.

No significant difference in performance between closely held and widely held firms. Significant controls: Standard variation on return on assets and equity, and R&D to sales.

No particular argument.

Nickell, Nicolitsas and Dryden [1997], European Economic Review

580 UK manufacturing firms.

1985-1994.

Dummies SC1, SC2, and SC3 equal to 1 if largest shareholder has 90% or 95% chance of winning a majority vote.

SC1 is a financial firm.

SC2 is a person, a family, a group of linked individuals, a company pension fund or charity.

SC3 is a non-financial company.

Productivity growth as change in log of real sales.

1) Lagged productivity growth. 2) Change in log of employment. 3) Change in log of capital stock. 4) Change in index of industry overtime hours. 5) Monopoly power by change of market share, or industry concentration, or industry import penetration or rent / value added. 6) Size by log of employment. 7) Financial pressure by interest payments / cash flow 8) Industry & time dummies.

Regression technique by Arellano and Bond 1991 for dynamic panel data models.

Checks for substitution effects between financial pressure, monopoly power and shareholder control by including interaction terms.

Productivity increases significantly with SC1 and decreases significantly with SC3.

Significant substitution effect between financial pressure and monopoly power, and SC1 and monopoly power.

Significant controls: Employment. Index of industry overtime hours. Market share. Rent / value added.

The efficient monitor argument, the free cash flow argument and a competition argument.

[1] Some of the studies have investigated other issues as well, such as, the relation between ownership structure and the risk of the firm’s performance.

[2] The reported period typically refers to the maximum period that a particular study applies. Often the performance variables are collected over the entire period, whereas the ownership variables and control variables are collected at one year in the investigated period. All studies use publicly traded firms (unless otherwise described), because they are easier to get information about.

[3] Abbreviations: Management control (MC); Ownership control (OC); Owner managed (OM); External control (EC); Strong owner control (SOC); Weak owner control (WOC); All owner control (AOC); Financial control (FC); Majority held (MH); Diffusely held (DH).

[4] The ownership variable is typically measured as concentration of ownership on a particular set of owners, e.g. ownership by managers or institutional investors.

[5] This colon includes 1) independent control variables, 2) dependent variables that are not performance or ownership variables, and 3) variables used for sample classification.