Ownership Duration and Firm Performance
Øyvind Bøhren, Richard Priestley and Bernt Arne Ødegaard
Norwegian School of Management BI
Jan 2005
Overview
• Ownership duration.
• Corporate Governance.
• Measuring duration: Problems...
• Facts about ownership duration.
• What determines ownership duration?
• Does duration affect corporate performance?
Focus of this paper: Ownership Duration
Ownership duration:
Ex ante: What horizon does an equity investor have when buying
an equity stake?
Ex post: How long did an equity investor hang on to the shares
before selling?
Does an equity owner’s horizon’s matter? In a complete and
efficient market: No
• If firms are run to maximize value, and this is common
knowledge, the value of a firm will reflect the present value of
future cash flows.
• But doesn’t the owners investment horizon guide her to
choose a company with a similar horizon?
– No. Equities can be sold at any time. What matters is that
an equity value correctly reflects the future cash flows.
Opinions about ownership patience
“Everybody” has opinions about ownership patience
• “Ownership patience is good, it allows companies to take a
long view.”
• “Short owner horizons forces companies to focus on next
quarter’s results.”
• “Impatient owners are good, their focus on the economic
results force companies to make optimal decisions.”
• “Patience should be tailored: Some companies need long term
owners since they have long investment horizons, others can
get by with short term owners.”
Question: How many of these opinions violate the basic notion of
market efficiency?
What market imperfections can make
ownership patience matter?
• Asymmetric information
Uncertainty about a company’s value may make it pay for
equity owners to become informed.
• Agency problems.
Large owners can have a monitoring role in disciplining
management.
Incentive: With a large stake an owner sees effects
immediately on the value of his stake
Problem: All other owners free ride on the large owner’s
monitoring of management
Long term horizon on equity investment: Spreads the
costs/benefits for a large owner over longer time frame.
Part of the learning by owners “cheap” (osmosis).
→ motivate looking at ownership duration in a corporate
governance setting.
Corporate Governance
Broadly: Studies the link between how a corporation is organized
and its (economic) results.
A very broad area of study.
• The Jensen and Meckling (1976) view of the firm as a nexus
of contracts.
• Conflicts of interests between:
•
•
•
•
Shareholders
Creditors
Management
......
• Agency Problems.
• Asymmetric information.
Corporate Governance –Economic
Performance studies
Corporate Governance theories.
Many partial theories, eg.
• Owner – Manager conflict: Incentives, empire building, waste
of resources ...
• Debt – Equity conflict.
• Information: Inside / Outside information – Signaling to
market.
• Boards: Chosen by whom?
Not really a comprehensive, testable theory.
Testing link governance performance
Empirical implementations of test of the link between corporate
governance and economic performance.
Crossectional regressions
• Dependent variable: Measure of economic performance
• Independent variables:
• Governance related (suggested by theory)
• Non-governance related, but still important for performance.
Governance related variables
• Insider ownership (mitigate shareholder-manager conflicts)
• Ownership concentration
• Owner type
• State
• Financial
• Foreign
• Industrial (nonfinancial)
• Private (individual)
• Security design (e.g. nonvoting stock)
• Capital Structure
Typical Controls (non-governance related)
• Product markets / Industry
• Firm size
(Not always obvious what goes where)
Empirical Governance - Performance
studies
Well–known examples
• Demsetz and Lehn (1985)
• Morck et al. (1988)
• McConnell and Servaes (1990)
• Agrawal and Knoeber (1996)
• Cho (1998)
• Bøhren and Ødegaard (2003) (Norway)
Look at Norwegian results (typical)
Our paper
Main Focus of the paper:
Adds ownership duration as a governance mechanism.
But:
Additionally: Generates useful stylized facts about ownership
duration.
Ownership duration. Relevant literature
Limited literature concerning ownership duration directly.
Theoretical
• Du (2001) Impatience: Commitment device
Empirical
• Bhagat et al. (2004): Relationship investing
• Gaspar et al. (2005): Link patience of institutional owners and
performance in a takeover setting.
Problem: How to measure ownership
duration?
• What owners to focus on?
• Based on rank (largest owner only?
averages of the largest owners?
weighted average based on rank/duration?)
• Based on stake (fraction owned?)
• The cutoff problem in measurement. (Only observe a finite
number of years)
How to define ownership duration?
6Fraction held
60%
Owner B
40%
Owner A
20%
0
1
2
3
4
5
Ways of defining individual duration
1 Time until owner lowers ownership stake.
2 Time until owner changes rank.
3 Time until owner lowers rank.
Duration
definition
1
2
Owner
A B
6 6
3 3
6
Time
Duration definitions
Will focus on the duration definitions:
• Time until owner lowers stake
(Information Duration)
• Time until owner changes rank
(Governance Duration)
Problems in defining duration, ctd
What owners to focus on:
• The largest only?
• Owners above some threshold stake/rank?
• Only the owner with the longest duration?
• (Averages of) owners satisfying some criteria on size?
Governance effects:
Largest owners most important?
Problems in defining duration, ctd
The cutoff problem
First Obs
Last Obs
Owner A
-
Owner B
-
Owner C
?-
?
0
1
2
3
4
5
6
Time
Focus on
• Firms surviving whole period?
• All firms?
→ Check sensitivity of conclusions to this
Owner D
Data
Oslo Stock Exchange 1989–1999.
• Stock exchange: (OBI)
• Stock returns etc
• Accounts
• Announcements: Insider trades
• Securities Registry (VPS)
• Annual owner lists, all owners.
Lists are anonymized, but with an unique ID which allow us to
follow each owner over time.
Data include owner type code, split into
•
•
•
•
•
State owners
Individual (Private) owners
Financial owners (Mutual funds etc)
Industrial owners (Nonfinancials)
Foreign owners
Facts: Ownership Duration at the Oslo
Stock Exchange 1989–1999
Determinants of Ownership Duration
• OLS regressions
• Binary choice analysis
Duration Determinants: OLS regressions
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
|
{z
|}
{z
|}
{z
}
}|
{
Duration measure
6
z
}|
z{
}|
z{
Governance variables
Controls
Duration Determinants: OLS regressions
Duration = f ( Governance variables
measure
Controls )
Duration Determinants: Binary Choice
Analysis
1989 1990 1991 1992 1993 1994 1995
-
Sell stake
Sell stake
-
A
Keep
A
stakeAAU A
Sell stake
Keep
A
stakeAAU A
Keep
A
stake
AA
U ...
Idea: (long) duration is the result of a sequence of annual
decisions.
Duration Determinants: Binary Choice
Analysis ctd
Should you stay or = f ( Governance variables
should you go
Controls )
Does Ownership Duration
affect firm performance?
Implementing an empirical test of whether duration and
performance is linked.
1
Regressions of averages.
2
Forward-looking regressions
Performance: OLS regressions
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Largest Owner 1 Owner 2
Owner
3
Owner
(
Duration m
{z
|}
{z
|}
{z
}
|
Governance
Controls
?
?
?
z
}|
z{
}|
z{
}|
{
Performance
Performance: OLS regressions
Performance = f ( Duration
(average)
Governance variables
Controls )
Performance: Sequential Regressions
Idea: Performance - result of past owner’s patience.
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-
Largest
Owner
- Q
|
{z
Duration measure
}
6
Governance variables
Controls
Conclusions
• Most owners are impatient
• The largest least impatient, but seldom patient
• Fincial insitutions: Least patient, owned by the least patient
• Duration and performance
• Indirect ownership has problems
• Financial institutions: Focus on short term results?
• Industrial owners: Sleeping?
• Direct ownership: Works better
• Patient private owners positive
• Foreign owners the same
Thus:
Patient ownership not a necessary condition for good
governance.
“Good” short term owners are not that bad...
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