Trust: The Social Virtues and the Creation of Prosperity

Using proxy data on all Fortune 500 firms during 1994-2000, we establish that, in order to understand whether and when family firms are more or less valuable than nonfamily firms, one must distinguish among three fundamental elements in the definition of family firms: ownership, control, and management. Specifically, we find that family ownership creates value only when the founder serves as the CEO of the family firm or as its Chairman with a hired CEO. Control mechanisms including dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings further suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.

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How Do Family Ownership, Control, and Management Affect Firm Value?

The ultimate ownership of Western European corporations

https://finance.wharton.upenn.edu/department/Seminar/2004Fall/MicroFall2004/micro-VillalongaAmit-v2-092304.pdf

How do family ownership, control and management affect firm value?

While political connections have been widely discussed in the literature on corruption, little work has been done to assess the value of these connections. This paper uses the Jakarta Stock Exchange's reaction to news about former President Suharto's health to address this issue. By examining the difference in share price reactions of firms with varying degrees of political exposure, a market valuation of the proportion of a firm’s value derived from political connections is inferred. The implied value is very high, suggesting that as much as a quarter of a firm’s share price may be accounted for by political connections. (JEL D21, G14)

/pdf/estimating-the-value-of-political-connections-clb8n6ew5l.pdf

Estimating the Value of Political Connections

During the 2008-2009 financial crisis, firms with high social capital, measured as corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. High-CSR firms also experienced higher profitability, growth, and sales per employee relative to low-CSR firms, and they raised more debt. This evidence suggests that the trust between the firm and both its stakeholders and investors, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock.

https://onlinelibrary.wiley.com/doi/pdf/10.1111/jofi.12505

Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis

We study the effect of ownership structure on firm value during the East Asian financial crisis that began in July 1997. The crisis represents a negative shock to the investment opportunities of firms in these markets that raises the incentives of controlling shareholders to expropriate minority shareholders. Moreover, the large separation between cash flow and control rights that often arise from the use of pyramidal ownership structures and cross-holdings in these markets suggests that insiders have both the incentive and the ability to engage in expropriation. Using data from over 800 firms in eight East Asian countries, we find evidence consistent with this view. Tobin's Q ratios of those firms in which minority shareholders are potentially most subject to expropriation decline twelve percent more than Q ratios in other firms during the crisis period. A similar result holds for stock returns - firms in which minority shareholders are most likely to experience expropriation underperform other firms by about nine percent per year during the crisis period. Further, during the pre-crisis period we find no evidence that firms with a separation between cash flow rights and control rights exhibit performance changes different from firms with no such separation. All of these results are robust to controls for country and industry effects, as well as proxies for differences in risk across firms and the strength of the country's legal institutions. The evidence indicates that corporate ownership structure plays an important role in determining the incentives of insiders to expropriate minority shareholders during the times of declining investment opportunities. Our results add to the literature that examines the link between ownership structure and firm performance and provide additional guidance to policymakers engaged in the ongoing debate about the proper role and design of corporate governance features and legal institutions in developing economies.

/pdf/ownership-structure-corporate-governance-and-firm-value-29ml2rnhqb.pdf

Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis

We use a sample of 800 firms in eight East Asian countries to study the effect of ownership structure on value during the region's financial crisis. The crisis negatively impacted firms' investment opportunities, raising the incentives of controlling shareholders to expropriate minority investors. Crisis period stock returns of firms in which managers have high levels of control rights, but have separated their control and cash flow ownership, are 10-20 percentage points lower than those of other firms. The evidence is consistent with the view that ownership structure plays an important role in determining whether insiders expropriate minority shareholders. CONFLICT OF INTEREST BETWEEN CORPORATE INSIDERS (controlling shareholders and managers) and outside investors is central to the analysis of the modern corporation in which insiders have less than full ownership of the cash flow rights of the firm (Berle and Means (1932) and Jensen and Meckling (1976)). These analyses suggest that the firm's ownership structure is a primary determinant of the extent of agency problems between controlling insiders and outside investors, which has important implications for the valuation of the firm. The insiders who control corporate assets can potentially expropriate outside investors by diverting resources for their personal use or by committing funds to unprofitable projects that provide private benefits. By diverting resources for private benefit, controlling managers have the opportunity to increase their current wealth or perquisite consumption without bearing the full cost of their actions.1 Alternatively, by investing resources within the firm in positive NPV projects,

/pdf/ownership-structure-corporate-governance-and-firm-value-2bg1chf5ob.pdf

This paper investigates the relation between cross listing in the United States and the information environment of non-U.S. firms. We find that firms that cross list on U.S. exchanges have greater analyst coverage and increased forecast accuracy than firms that are not cross listed. A time-series analysis shows that a change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have higher valuations. Furthermore, the change in firm value around cross listing is correlated with changes in analyst following and forecast accuracy, suggesting that cross listing enhances firm value through its effect on the firm's information environment. Our findings support the hypothesis that cross-listed firms have better information environments, which are associated with higher market valuations.

/pdf/adrs-analysts-and-accuracy-does-cross-listing-in-the-united-4k647wmpuu.pdf

ADRs, Analysts, and Accuracy: Does Cross Listing in the United States Improve a Firm's Information Environment and Increase Market Value?

This paper investigates whether management stock ownership and large non-management blockholder share ownership are related to firm value across a sample of 1433 firms from 18 emerging markets. When a management group's control rights exceed its cash flow rights, I find that firm values are lower. I also find that large non-management control rights blockholdings are positively related to firm value. Both of these effects are significantly more pronounced in countries with low shareholder protection. One interpretation of these results is that external shareholder protection mechanisms play a role in restraining managerial agency costs and that large non-management blockholders can act as a partial substitute for missing institutional governance mechanisms.

Karl V. Lins

Papers

Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis

Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis

Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis

ADRs, Analysts, and Accuracy: Does Cross Listing in the United States Improve a Firm's Information Environment and Increase Market Value?

Equity Ownership and Firm Value in Emerging Markets