Foreign Direct Investors as Change Agents:The Swedish Firm Experience

Kathy S. Fogel*, Kevin K. Lee, Wayne Y. Lee, and Johanna Palmberg

ABSTRACT

Manuscript Type: EmpiricalResearch Question: Prior studies examine corporate governance either at the firm level, with limited attention paid tosocietal culture and norms, or at the nation-state level, with limited attention paid to the management practices of firms. Inthis study we examine the impact on the corporate governance of Swedish firms brought about by foreign investors. Weargue that in countries like Sweden with strong culturally embedded norms and control exercised by dominant domesticshareholders, control-seeking foreign investors can act as agents of change to improve firm performance through moreefficient capital utilization and labor productivity.Research Findings: We find that the entry of foreign equity investors over the years 19922008 surrounding Swedensformal admission to the European Union in 1995 enhanced the financial performance of large publicly traded, domesticowner-controlled firms in Sweden. The heightened performance of Swedish firms was not simply a result of cross-borderportfolio investments by institutions as the literature on shareholder activism implies. Rather, significant advancements infirm performance occurred only when an increase in voting participation by foreign direct investors was coincident with adecrease in the excess voting power of the largest domestic shareholder, which gave foreign equity investors a criticalvoice in the management of the firm.Theoretical Implications: Informal institutions influence corporate governance by aligning corporate goals with sociallyacceptable outcomes. Corporate governance practices, if culturally embedded, cannot be easily displaced even when thegains in economic efficiency are large. Corporate owners stand to benefit from the maintenance of the status quo and maynot welcome radical changes that can lead to a creative destruction of their market power and political dominance.Foreign portfolio investors who focus solely on cash flow rights of the firm cannot effectively change decision making in theboardroom. Foreign direct investors, who actively seek voting shares and control rights, will have the utmost potential toeffect change in corporate governance by advocating for new corporate priorities and objectives at board meetings.

Keywords: Corporate Governance, Foreign Direct Investors, Informal Institution, Business Culture

INTRODUCTION

A n extensive literature on institutional economicsestablishes a causal link between a countrys formalinstitutions and its economic success (Acemoglu, Johnson,& Robinson, 2001; Botero, Djankov, La Porta, &Lopez-de-Silanes, 2004; Djankov, La Porta, Lopez-de-Silanes,& Shleifer, 2002; La Porta, Lopez-de-Silanes, Shleifer, &Vishny, 1998, 2000; North, 1990). A well-functioning legalsystem that protects private property rights and reducestransaction costs in arms-length exchanges, as well as inves-tor protection laws that enable capital to flow from thosewho have it to those who need it, supports the birth and

expansion of innovative firms (Beck, Levine, & Loayza, 2000;Henrekson & Johansson, 2009; Johansson, 2010; Wurgler,2000). Disclosure and fraud deterrence encourage broadequity market participation by external investors andinformed price discovery improves capital allocation to themost productive firms (Morck, Yeung, & Yu, 2000).But as North (1990) observes, informal institutions can

play an equally important role. The tacit rules of the game social values, cultural norms, as well as traditions, facilitatecommunication and mutual understanding in societies thatestablish trust, consensus, and national/ethnic identityamong strangers. Informal constraints on behavior, whichdo not take the form of legal statutes, and misconduct notresulting in specific monetary or criminal penalties, cannonetheless effectively shape and influence economic per-formance and stability.1

*Address for correspondence: Kathy S. Fogel, Sam M. Walton College of Business,University of Arkansas, Fayetteville, AR 72701, USA. Tel: +1-479-575-5301; E-mail:kfogel@walton.uark.edu

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In this paper, we make the case that foreign investors arenot as deeply invested in maintaining the status quo of localhost countries and can have different priorities, businesscultures, and practices that reflect their home countrysinformal institutions. Cross-border investments can changethe informal rules of the game that reorients corporate gov-ernance, and thereby, impact financial efficiency and firmvalue. Further, globalization can decrease the cost of capitalby reducing information asymmetry and associated agencycosts; improve the financial flexibility of domestic firms byincreasing the pool of potential investors and financingopportunities; and expand cross-border flows of knowledgeand technology. An influx of foreign investors can beexpected to improve firm performance (Oxelheim &Randy, 2003; Stultz, 1999).Sweden is a unique setting for the study of corporate

governance in advanced economies. On the one hand, LaPorta et al. (1998, 2000) rank Sweden far above other coun-tries on rule-of-law; and Durnev, Errunza, and Molchanov(2009), rank Swedens transparency fifth out of 69 countries.Compared to Anglo-Saxon countries, Sweden provides rela-tively poor minority shareholder protection (La Porta et al.,1998, 2000). Agnblad, Berglf, Hgfeldt, and Svancar (2001)note, however, the absence of evidence that minority share-holders in Sweden are exploited. The deficiency in formallaws that protect minority shareholders is more than offsetby high standards of legal enforcement and accounting.On the other hand, among advanced economies, Sweden

represents an extreme case where corporate ownership andcontrol is highly concentrated (La Porta, Lopez-de-Silanes, &Shleifer, 1999). Corporate law and the Swedish CorporateGovernance Code explicitly favor firms with strong majorityowners and enable private owners to establish and maintaincontrol of listed firms through pyramidal ownership struc-tures and dual-class shares. Many other countries, especiallyin Europe, allow similar ownership structures. But fewcountries permit pyramid structures, vote-differentiateddual-class shares, and cross-holdings, to be used jointly.Moreover, even among countries that allow dual-classshares, the proportion of firms that use dual-class shares ishigher in Sweden than any other country in Europe(Bennedsen & Nielsen, 2004; Faccio & Lang, 2002).External events and attenuation in economic nationalism

triggered the abolition of restrictions on foreign ownershipand an attitudinal change in legal support for control-enhancing mechanisms. The resulting entry of foreignequity investors over the years 19922008 surrounding Swe-dens formal admission to the European Union in 1995improved the financial performance of large publicly traded,owner-controlled firms in Sweden.2The implications of our significant finding are twofold. In

contrast to prior literature, cross-border investments overthis distinct 17-year sample period were not motivated bythe exceptional performance of Swedish firms. On the con-trary, the notable decline in per capita GDP and standard ofliving of Sweden relative to OECD countries in the twodecades following its peak in the early 1970s reflected theunderperformance of Swedish firms. Significant meanreversions in the performance of Swedish firms during thissample period utilizing return on assets, return on equity,and earnings per share as proxies, are inconsistent with

momentum driven, return-chasing behavior by foreigninvestors.Importantly, we show that the enhanced performance of

Swedish firms was not simply a result of cross-border port-folio investments by institutions as the literature on share-holder activism implies. Gillan and Starks (2003) find thatforeign institutional investors play an important role inmonitoring management and prompting changes in corpo-rate governance practices worldwide; Ferreira and Matos(2008), that foreign institutional ownership is positively cor-related with the value and performance of firms outside ofthe United States; and Aggarwal, Erel, Ferreira, and Matos(2011), that foreign investors were able to change corporategovernance mechanisms and outcomes. These studies,however, must contend with a significant endogeneityissue.3 Appropriate inferences about the impact of cross-border investments by foreigners on firm performance willrequire satisfactory controls for self-selection bias theincentive of foreigners to concentrate their investments inhigh performing firms.Our research design avoids the endogeneity issue entirely.

Foreign equity investors in Swedish firms over this 17-yearsample period were predominantly institutional. Significantadvancements in firm performance occurred only whenthere was an increase in participation by foreign direct inves-tors coincident with a decrease in the excess voting power ofthe largest domestic shareholder that gave foreign equityinvestors a critical voice in the management of the firm.Neither an increase in foreign participation nor a decrease inexcess voting power of the largest domestic shareholderalone was sufficient. Further, we find that the participation ofcontrol-seeking domestic equity investors did not appear tohave the same effect. There was no significant change in firmperformance from declines in the excess voting power of thelargest domestic shareholder that resulted from an increasein participation by control-seeking domestic investors.Foreign direct equity investors, primarily from the UnitedStates and the United Kingdom, can assume leading roles aschange agents in reducing the unproductive deployment ofcapital and labor.Table 1 shows a dramatic increase in foreign ownership

and voting participation in Swedish firms from the early1990s through 2008 following a deregulation of capitalmarkets in the 1980s and elimination of restrictions onforeign ownership in 1992 as preconditions for its admissioninto the European Union. The percentage of ownership andvoting rights declined over the 17-year sample period 19922008 and, as a result, the excess voting power of the largestdomestic shareholder. There was a concurrent fall in the useof dual-class shares by Swedish firms as well.Table 1 suggests that the large influx of foreigners may

serve as one of the possible channels to stimulate GDPgrowth and a rise in overall market capitalization and equityshare issuance. Specifically, Sweden experienced a greaterthan average of OECD GDP per capita growth over theperiod 19942010. Improvements in individual firm perfor-mance from the entry of foreign direct equity investors start-ing in 1992, which preceded the admission of Sweden intothe European Union in 1995, had a positive long-term effecton the overall economy. The reversal in Swedens economicperformance since 1992 was significant. Until the early

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1970s, Swedens economic performance was stellar. In stan-dard of living, Sweden ranked fifth among OECD countries.But in the two decades that followed, Swedens relative eco-nomic performance deteriorated. The McKinsey GlobalInstitute (1995) Swedens economic performance reportnoted that by 1990, Swedens GDP per capita was surpassedby Germany, France and Japan; and by 1993, surpassed byItaly and the United Kingdom, following the 19901993Swedish economic recession.The prolonged decline in standard of living, some argue,

was primarily due to a fall in labor productivity. Hanssonand Lundberg (1991) find that Swedens total factor produc-tivity growth over the 19701985 period was the lowestamong OECD countries. Others argue that the economicdecline was caused by a lack of economic evolution or entre-preneurship. Low levels of innovation, defined as new orsubstantially improved products, services or productionprocesses and productivity growth, are important factors ineconomic evolution. For economic evolution to progress, theenvironment must encourage job creation and destruction.Inflexibility in labor markets hampered this need (Boteroet al., 2004). Family control and ownership concentration,both salient features in Sweden (Henrekson & Jakobsson,2003), are correlated with lower rates of downsizing(Jackson, 2005) and lower growth rates (Bjuggren, Daunfeldt,& Johansson, 2010). Sako and Jackson (2006) find that theability of strong labor unions in Sweden tomobilize support,and as a result, exert greater power in the bargaining processcreates job security. In addition, a number of institutional

changes in credit market regulations, taxes, labor marketlegislation, as well as access to product markets institutedafter World War II provided poor incentives for entrepre-neurship (Johansson, 2008).4Unlike prior studies that primarily center on formal insti-

tutions and, in particular, on how the worldwide spread inshareholder protection laws improved corporate governance(Aggarwal et al., 2011), the focus on Sweden affords anatural experiment for exploring the effect of informal insti-tutions on firm performance. Informal institutions influencecorporate governance by aligning corporate goals withsocially acceptable outcomes. Owners and controlling share-holders of large corporations are heavily vested in and abideby local values and ideals. Such values constrain corporategovernance choices. Anglo-American corporations take ashareholder orientation that places efficiency above welfare,but in German and Japanese corporations, a stakeholderorientation that places common interests ahead of financialperformance (Dore, 2000).Culturally embedded corporate governance practices

cannot be easily displaced even when the gains in economicefficiency are large. Corporate owners stand to benefit fromthe maintenance of the status quo and may not welcomeradical changes that can lead to creative destruction oftheir market power and political dominance. The extensiveuse of dual-class shares among Swedish listed firms is a casein point. In 1995, three of the large listed firms on the Stock-holm Stock Exchange (SSE) had vote-differentiated shareswith a factor 1000:1. External pressure resulted in SKF and

TABLE 1Trend in Ownership and Control of Swedish Firms

1992 1996 2000 2004 2008

FCapital 4.07 17.08 19.47 19.98 25.53FVote 3.55 14.11 18.03 18.52 23.43Foreign Ownership of Total Capital, % 14.40 32.10 39.20 33.30 37.30D1Capital 35.05 26.79 23.05 22.73 21.32D1Vote 50.21 39.41 32.92 30.79 28.72Excess Votet 15.15 12.62 9.87 8.06 7.40Firms with dual-class shares (%) 86.63 69.95 59.69 54.15 45.95GDP (SEK billions) 1,448 1,690 2,013 1,926 3,182Market capitalization (SEK billions) 552 1,210 3,800 2,115 3,691Market capitalization to GDP (%) 38.12 71.60 188.77 109.81 116.00New issues (SEK billions) 1.79 2.74 2.73 4.10 6.50

External public pressure on Sweden to join the European Union in the early 1990s was an exogenous catalyst that led to an influx of foreigninvestors. D1Vote and FVote are the percentages of voting rights exercised by the largest domestic shareholder and the aggregate of allforeign investors, respectively; and D1Capital and FCapital are the ownership percentages of the largest domestic shareholder, theforeign direct investor, and the aggregate of all foreign portfolio investors, respectively. Excess Votet is the difference between theownership and voting percentages of the largest domestic shareholder. Average ownership and voting percentages of Swedish firms heldby foreigners increased from 4.07% and 3.55%, respectively, on average in 1992 to 25.53% and 23.43%, respectively, in 2008. Foreignownership of total market capital increases from 14.4% to 37.3% during the sample period. There was a corresponding decrease in excessvote of the largest domestic shareholder from 15.15% in 1992 to 7.40% in 2008; their ownership and voting declined from 35.05% and50.21%, respectively, in 1992 to 21.32% and 28.72%, respectively, in 2008. The same period saw a concurrent: (1) 53% decrease in the useof dual-class shares from 86.63% in 1992 to 45.95% in 2008; (2) 5% annual compounded growth rate in GDP from SEK 1,448 billion in 1992to SEK 3,182 billon in 2008; (3) 13% annual gain in market capitalization from SEK 552 billion in 1992 to SEK 3,691 billion in 2008; and (4)8% annual expansion in initial public offerings.

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Electrolux changing their voting structure to a factor of 10:1in 1999, and LM Ericsson followed suit in 2004. It is inter-esting to note that the SHB-sphere was the largest ownerin Ericsson, and the Wallenberg sphere was the largestowner in SKF and Electrolux, and the second largest, inEricsson. Furthermore, all possible successors of culturallyentrenched owners, particularly in closed economies, mayshare similar traditions and beliefs. A nonconformist canface intense social ostracism.The rest of the paper is organized as follows. A brief

introduction to the role of institutions is presented in thenext section along with important characteristics of Swedishinstitutions. The third section describes the data and variableconstruction. The fourth section presents the empiricalresults and interpretations. Concluding remarks are given inthe final section.

SWEDISH INSTITUTIONS ANDFOREIGN INVESTORS

Overview of the Swedish InstitutionsThe modern Swedish economy was created in the latenineteenth century based on developing industries thatwere of contemporary importance namely, manufacturing,mining, steel, forestry, and pulp. A majority of the largestfirms listed on the SSE were founded during these earlyyears of industrialization (Hgfeldt, 2005). The followingsection discusses how Swedish governance evolved in closeconnection with the political prominence of the SocialDemocratic Party (SAP) and draws on the analysis presentedin Roe (2005), Hgfeldt (2005), and Henrekson andJakobsson (2012).The Swedish political system during the twentieth

century was essentially a one-party regime. The SAP ruledthe country from 1932 to 2006. The exceptions were a coali-tion government from 1939 to 1945, and two short periods ofnon-socialist government coalitions, from 1976 to 1982 and1991 to 1994. The overall goal for the economic policy was tocreate a social capitalist economy and to unite labor andcapital owners [P]olitical support and legitimacy of heavyentrenched private ownership is traded-off against the implicitguarantee that the largest listed firms do not migrate and that theycontinue to invest (Hgfeldt, 2005:570). SAP introduced taxrelief for capital-intensive industries, beneficial exporttariffs, and corporate governance rules that benefitted con-trolling shareholders in the form of political support forextensive use of dual-class shares, cross-holdings, and pyra-mids. The SAP also introduced centralized wage negotia-tions, dividend restrictions, heavy taxation on individualownership, and wage-earner funds. The reforms created asociety where (i) individual wealth accumulation was discour-aged, (ii) institutional ownership was stimulated relative to indi-vidual ownership and (iii) the overall policy magnified the (alreadystrong) dependence on large companies in Sweden (Henrekson& Jakobsson, 2003:96).The three most important political reforms that were the

basis for the foundation of contemporary Swedish corporategovernance were: (1) the regulation of bank ownership (1911and 1934); (2) restrictions on foreign ownership; and (3)reform of the corporate tax laws in 1938. In 1911, banks were

allowed to directly hold ownership in industrial companiesin Sweden. Subsequent to a financial crash in the late 1920s,a new banking act prohibited banks from direct equity own-ership. Banks were, however, allowed to hold equity indi-rectly through holding companies if shares were distributedamong the banks shareholders. This exemption enabledcontrolling owners of the bank to maintain control of theindustrial firms, as holding companies were organized asclosed-end-investment funds (CEIF). CEIFs, often listed onthe SSE, were the entities through which ownership-spheresby controlling (family) owners were formed (Hgfeldt,2005).Lindbeck (1997) describes Swedish corporatism as a dis-

ciplined cooperation between labor and entrenched ownersthat harks back to the Saltsjbaden Agreement of 1938between the Swedish Trade Union Confederation (LO) andthe Swedish Employers Confederation (SAF). Unlike mostother countries in Europe, Swedens neutrality in two worldwars allowed a sufficiently long period of stability duringwhich Social Capitalism attained cognitively based legiti-macy (Suchman, 1995) and, thereby, established the relativepermanence of its institutions. After World War II, the tiesbetween the SAP and LO strengthened, which bolsteredlabor in its dealings with SAF. From the late 1970s throughearly 1980s, a deterioration in relations between the LO andSAF (Lindbeck, 1997) led to a decline in the Swedisheconomy. The deregulation of the capital markets in the1980s and abolition of restrictions on foreign ownership in1992 induced changes in corporate governance. These politi-cal reforms and membership in the EU that increased inte-gration and access to a common market were markedresponses to external events.Many scholars (e.g., Dore, 2000; Hall & Soskice, 2001;

Hollingsworth & Streeck, 1994; Jackson & Deeg, 2008;Jacoby, 2005; Streeck, 2001; Whitley, 1992) argue that capital-ism can take forms that go beyond the shareholder-focused,market-oriented, Anglo-American norm. In coordinatedeconomies such as Sweden, corporate governance seeks toalign the differing interests of labor, capital owners, and thestate. By achieving a political consensus between labor andmajor capital owners,5 proponents of the Swedish modeldescribe the governance structure as promoting strongprivate ownership that embraces a long-term point of viewand accepts a social responsibility towards employees andsociety in general (Agnblad et al., 2001).

The Swedish Corporate Governance ModelThe first Swedish Corporate Governance Code, introducedin 2004, applied only to the largest firms listed on regulatedstock exchanges in Sweden. The contemporary Code,revised in 2010, covers all firms listed on both stockexchanges NASDAQ OMX Stockholm and NGM Equity.The Code, which is self-regulating, embodies a comply andexplain approach. Firms are allowed to deviate from theCode but are required to explain non-compliance with rec-ommendations. The Swedish Companies Act and SwedishAnnual Accounts Act, together with regulations prescribedby the Swedish Securities Council and stock exchanges, con-stitute the regulatory framework.

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Swedish corporate governance revolves around theinvolvement of three parties: shareholders at annual meet-ings, a board of directors, and chief executive officer (CEO);each with clearly prescribed rights, functions, and authority.Both the Companies Act and Corporate Governance Codestress the importance of active shareholders and promoteactive participation by controlling shareholders in the gov-ernance of the firm. Although from an international perspec-tive, minority protection is relatively weak, the Codeacknowledges potential problems with controlling ownersand attempts to address them. Specifically, the Code cata-logues issues that require a qualified majority at the annualshareholders meeting. Additionally, the Code recommendsthat minority shareholders should be represented in thenomination committee (Swedish Corporate GovernanceBoard, 2010).Swedish corporate governance follows a Continental

European paradigm shared by countries such as France andGermany.6 A key feature is the presence of strong blockhold-ers who enjoy highly concentrated ownership and trans-generational family control (Fogel, 2006; La Porta et al.,1999). Governance also encourages firms to rely more oninternal funding and less on equity markets (Fohlin, 2005;Murphy, 2005). Swedish firms are unique, moreover, in theextensive use of control-enhancing mechanisms, whereowners with extremely small stakes can exercise managerialcontrol (Henrekson & Jakobsson, 2012; Hgfeldt, 2005).Bennedsen and Nielsen (2004) show that 55 percent of theSwedish listed firms use dual-class shares compared to 18percent in Germany and only 3 percent in France.Roe (2005) presents a conceptual framework that

describes three dimensions of corporate governance in largepublic firms: (1) a horizontal dimension, which outlines thetraditional agency problem between senior managementand dispersed investors (Jensen & Meckling, 1976); (2) avertical dimension, which focuses on the Europeanagency problem between majority and minority sharehold-ers (Stultz, 2005); and (3) the societal legacy of corporations.The influences of Swedish political institutions on the lattertwo dimensions that characterize Swedish corporate gover-nance are highly relevant for the present analysis.SAP shaped a unique ownership structure where a few

controlling owners are able to exercise control of largepublic firms with low equity investments. The liberal rulesthat favor blockholders were instituted in exchange for thepromise to keep firms and, thereby, employment opportuni-ties domiciled in Sweden. The power of strong labor unionshelped sustain concentrated ownership because only con-trolling owners had the ability and incentive to bargain formanagement policies that dispersed owners could not.Strong labor institutions also explain the resistance to imple-ment reforms that strengthened shareholder orientationand, thereby, a loss of power by controlling owners.Further, the ability to capture free cash flows with rela-

tively low equity investments reduces the cost of retainedearnings, and the tax code, in conjunction with strongsupport by SAP for financing through debt and retainedearnings, allowed Swedish firms to be less reliant on exter-nal equity markets (Hgfeldt, 2005). Muted incentives forthe development of external equity capital markets ensuredthat ownership remained largely concentrated in Sweden.

Carlsson (2007) contends that the Swedish system of cor-porate governance minimized the principal-agent problembecause it allowed a shareholder to obtain the requisite votesto effectively control management at a lower cost than whenthe property and voting rights of stock ownership areequalized. Boubakri, Cosset, and Guedhami (2005) findownership concentration has a positive impact on post-privatization firm performance. However, even when man-agement acts in the best interests of a minority shareholderwith majority voting rights, there is an implied assumptionthat the interests of the shareholders with majority votingrights are aligned with the interests of other shareholders.As Berle and Means (1932) and Jensen and Meckling

(1976) make clear, the incentive misalignment from separat-ing ownership and voting rights potentially worsens theagency problem. The negative effects of separating owner-ship and control are corroborated by Bjuggren, Eklund, andWiberg (2007). With vote-differentiated shares, the marketfor corporate control is less effective in resolving conflicts ofinterests between majority and minority shareholders.Cronqvist and Nilsson (2003) document a value discountwhen a minority shareholder is in control. To the extentforeign investors can decrease excess voting power exer-cised by the largest domestic shareholder, the performanceof Swedish firms should improve.

Institutions and the Role of Foreign InvestorsThe special role of foreign direct investors as unique changeagents for improving corporate governance is rooted in therole of institutions. Institutions are the rules of the game ina society that constrain human behavior (North, 1989,1990). Formal institutions are the written laws and regula-tions that define a countrys legal system and regulatoryenvironment. The enforcement, adjudication, and assess-ment of civil and criminal penalties are clearly specified.Informal institutions are the unwritten values, beliefs,customs and traditions that define a countrys culture andcode of conduct. Enforcement is self-policing in nature andpenalties take the form of public rebuke and ostracism.Formal institutions can change. Laws and regulations

can be supplemented, modified, or eliminated. Because alengthy political and legislative process is involved, changesin formal institutions are episodic. There can be long periodsof stagnancy and, very often, the catalyst is a response to asignificant external shock. In Sweden, restrictions on foreignownership were abolished in 1992 and capital markets werederegulated in the second half of the 1980s. Changes ininformal institutions, in contrast, are intergenerational andevolve slowly. Values, beliefs, customs, and traditions repre-sent tacit knowledge that requires time to digest, update,and become embedded as a societal norm. As Roe (2005)points out, it is far easier to effect a legislative change in lawthan a change in culture.An important aspect of Swedish corporate governance is

the reliance on informal enforcement mechanisms with con-siderable discretion exercised by controlling shareholders.Holmn & Knopf (2004:169) show that Swedens extralegalinstitutions and norms protect minority shareholders. Suchinstitutions represent self-enforcing social norms sharedby citizens and communities. Some well-documented

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examples include compliance to tax codes, which demon-strate social trust and strength of shared social values (for acomprehensive review, see Torgler, 2007), and circulations ofnewspaper or library books, which signify participation andengagement in communities and society to build socialcapital (Preer, 2001). Controlling owners, concerned overreputation and social status, therefore limit the abuse ofminority shareholders. In Sweden, social prestige is a sig-nificant private benefit associated with the control of largecorporations. Families ownmany of the large Swedish firms.These families have built long-term relationships withemployees, bankers and suppliers, and politicians based ontrust (Poza, 2007).In civil law countries like Sweden, changes in formal stat-

utes that protect minority shareholders involve a politicaland legislative process that foreign investors are unlikely toinitiate. Advancements in corporate governance are morelikely to come from informal changes in managerial conductadvanced by foreign investors toward shareholder maximi-zation. But demands for change in Swedish firms can beignored by well-protected, controlling domestic owners.Foreign direct investors will be successful in effecting suchchanges only when the controlling domestic owner iswilling to relinquish some voting control. Further, whensuch changes are successful, increased firm performance isexpected.In making cross-border investments, foreign investors

recognize and adapt to the formal institutions of the hostcountry. The likelihood of detection and severity of punish-ment for legal infringements are easy to understand. Differ-ences in societal cultures between home and host countriesare another matter. Foreign investors may not be fully awareof local customs and traditions nor view these customs andtraditions with the same affinity or attachment. Moreover,the benefits from conformity to customs and traditions maybe private, that is, are unique to locals and may not accrue tooutsiders because of their foreignness. Lastly, the societalpenalty for breaching an informal rule of conduct can beperceived differently by a foreigner than by a local. In Chinathe concept of saving or losing face is an integral part ofthe national psyche. To lose face is to subject oneself andfamilial relations to intense humiliation that is to be avoidedat all costs. But for a foreigner, the threat of societal chastise-ment may be viewed as no more than an inconvenience andembarrassment.Foreigners are not only more likely to be unaware of or

lack appreciation for local customs and traditions, but arealso less susceptible to societal pressures for conformity tosocietal norms of conduct. More importantly, foreign directinvestors have the potential to effectively act as agents ofchange and have an interest in acquiring control rights.Foreign portfolio investors will focus instead on the owner-ship rights to cash flows from monetary investments andhave no interest in challenging the institutions of the hostcountry. Domestic investors, who are already in privilegedsocietal positions, are also unlikely to undertake institutionalchanges that place their favored position in jeopardy.Deregulation of capital markets in the 1980s, finalized in

1989, and subsequent external public pressure on Sweden tojoin the European Union in the early 1990s, was an exog-enous catalyst that led to an influx of foreign investors. Over

our study period 19922008, foreign investors were pre-dominantly from the United States and United Kingdom an overall average of 40 perent and 14 perent and at the peakin 2000, 52 perent and 24 perent, respectively, of all foreigninvestors.7 These Anglo-American foreign investors, whosought an active role, posed a challenge to Swedish corpo-rate governance.8 Foreign direct investors will demandmanagerial performance consistent with shareholder-oriented capitalism (Errunza, 2001).

EMPIRICAL DESIGN

Data SourcesDetails on ownership and voting rights9 of Swedish firmswere obtained from annual publications of SIS garserviceABs Owners and Power in Swedens Listed Companies,which over the 19922008 sample period covered all compa-nies listed on the SSE and the NGM Exchange. The datasetdoes not include companies listed on the SSE domiciledabroad. The publications assemble and track corporate iden-tities and name changes as well as ownership and votingpercentages of the largest domestic shareholders, foreignequity shareholders, and up to a total of 25 largest share-holders. On average, these shareholders represent 80.6perent of the vote in all listed companies and 84.2 perent indual-class issuing companies.There are five primary sources of information used to

construct the Owners and Power dataset. These include: (1)two different documents from VPC AB and Swedish Secu-rities Register Centre that are the Public Shareholders Reg-ister and Register of Nominee Shareholders; (2) the SwedishFinancial Supervisory Authoritys regularly published flagup or flag down disclosures;10 (3) required disclosures tothe Swedish Financial Supervisory Authority of changes inlarge block private individuals who either own more than200 shares or whose shares have a market value of at leastSEK 50,000; (4) SIS garservice ABs proprietary data; and(5) voluntary disclosures by shareholders themselves.Firm characteristics as well as accounting data were

obtained from Compustat Global over the sample period.Data were merged manually because the only identifier thatcould be used, company name, was not always consistentlyrecorded in the same manner and changes over time werenot always reflected. The fact that many of the names are inSwedish, and often abbreviated, complicated matters.

HypothesisIn a prior study, Dahlquist and Robertsson (2004) observe apositive correlation between foreign ownership and firmperformance. Foreigners invest in firms with strong recentperformance. The resulting increase in the proportion offoreign ownership lowers the cost of equity. In theory, firmperformance is enhanced because a lower cost of capitalallows firms to undertake more positive net present value(NPV) projects. The causal link between foreign ownershipand improved firm performance is, however, unclear.Investing in firms with an established record of strong per-formance seems to suggest that foreigners chase winners.Further, a reduction in cost of equity from higher equity

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valuations may simply be a byproduct of portfolio invest-ments by foreigners in informationally inefficient localequity markets. To establish a causal link between foreignparticipation and firm performance, it is critically importantto distinguish between direct and portfolio foreigninvestors in Swedish firms based on their relative interest inproperty and voting rights, which Manne (1965) and Marris(1964) point out, are both attached to equity ownership.Specifically, we examine the Hirschman (1970) Hypoth-

esis. Portfolio investors are primarily interested in the cashdistributions and contingent claim values associated withproperty rights. For portfolio investors, concern with firmperformance is short term and limited to assessments of itsimpact on the potential returns from equity ownership.When realized returns fail to meet expectations, foreignportfolio investors will tend to liquidate their investmentsand reinvest the proceeds in other firms. Because foreignportfolio investors are most likely to invest in well-performing firms, only domestic investors (e.g., founderfamilies), who may have other incentives for equity owner-ship, are apt to show loyalty and retain equity ownershipwhen firm performance is poor.In contrast, foreign direct investors take a long-term view

of the potential benefits of equity ownership and are moreinterested in improving firm performance by influencingcorporate governance that comes from the exercise of votingrights. As Bjuggren and Bohman (2006) argue, only thosewith the ability to increase residual income stand to benefitfrom acquiring enough control rights to enforce a value-increasing change. Foreign direct investors are moreprepared and willing to exercise voting rights to affectmanagerial behavior that leads to improved performance. Indistinguishing between foreign direct and foreign portfolioinvestors, we explicitly address the paradox of ownershipconcentration without commitment (Davis, 2008) - namelythat, institutional owners can have large ownership stakesbut will likely prefer a share sale exit strategy over an exer-cise of voting rights to effect a change in corporate gover-nance when firm performance does not meet expectations.

Foreign Portfolio, Foreign Direct, andControl-Seeking Domestic Investor DefinitionsWe restrict our sample to firms with dual-class shares. Thisrestriction is necessary to clearly identify control-seekingforeign equity participation. In Sweden, shares of all classescarry the same cash-flow rights i.e., dividend rates, but Ashares carry significantly more voting rights than B shares orC shares. Concentrated control of A shares by a few large,domestic owners further reduces the supply of A shares.Consequently, Class A shares sell at a premium price andtend to have lower liquidity. Their acquisition by foreign ordomestic investors clearly indicates intent to exert control.Over our sample period, firms with dual-class shares repre-sent between 46 perent perent and 84 perent of all publiclytraded firms, with the proportion monotonically decliningover time.For each firm, we examine the annual changes in foreign

and domestic ownership from the prior year. Three yearlydummy variables F-Portfoliot, F-Directt, and CSDt are usedto indicate the nature of the changes in foreign and domestic

ownership.A firm is categorized as F-Portfoliot in a particularyear when the only change in equity investments are byforeign portfolio investors who only acquire Class B sharesand their ownership changes do not exceed 5 perent. Theserestrictions ensure that the interests of foreign portfolioinvestors are purely financial and do not stem from theexercise of voting rights.Firms are categorized as CSDt or F-Directt in a particular

year, when the changes in equity investments by control-seeking domestic or foreign direct investors are eitherthrough the acquisition of Class A shares or Class B sharesthat increase ownership by 5 perent or more, and thechanges in equity investments result in a decline in theexcess and total voting power of the largest domestic share-holder.11 Focus is on the largest domestic shareholder asopposed to the largest 2, 3, 5, or other arbitrary number ofdomestic shareholders, for two reasons. First, the largestdomestic shareholder exercised (on average) over 50 percentto 29 percent, respectively, of the votes from the beginning tothe end of the sample period 1992 to 2008. Second, as LaPorta et al. (1999) point out, 20 percent is sufficient for oneshareholder to effectively control the company.Because the holdings of Class A shares are concentrated

among a few parties, the acquisition of a sufficiently largenumber of Class B shares in open markets can also be asubstitute. Requiring a reduction in total voting powerensures that the largest domestic shareholders do not makecompensating changes in loss of control from the sale ofClass A shares through the purchase of Class B shares. Inother words, it is unambiguous that the largest domesticshareholder voluntarily relinquished some control to othercontrol-seeking investors.We denote D1Vote and FVote as the percentages of

voting rights exercised by the largest domestic shareholderand the aggregate of all foreign investors, respectively; andD1Capital and FCapital, AS the ownership percentages ofthe largest domestic shareholder and the aggregate of allforeign investors, respectively. Excess Vote is the differencebetween the ownership and voting percentages of thelargest domestic shareholder.

Summary StatisticsWe use three proxies of profitability to capture firm perfor-mance. ROAt, ROEt, and EPSt, are defined as: Net Incometdivided by Average Total Assetst-1,t, Average ShareholdersEquityt-1,t, and Average Number of Shares Outstandingt-1,t,respectively; and future one-year changes in firm perfor-mance DROAt,t+1, DROEt,t+1, and DEPSt,t+1 as ROAt+1 ROAt,ROEt+1 ROEt, and EPSt+1 EPSt, respectively. The number ofemployees is used as a surrogate for Sizet of firm. We useAverage Plant, Property, and Equipmentt-1,t and Net Revenuetdivided by Average Number of Employeest-1,t as proxies forCapital Intensityt and Labor Productivityt, respectively, andfuture changes, DCapital Intensityt,t+1 and DLabor Productivi-tyt,t+1, as Capital Intensityt+1 Capital Intensityt and Labor Pro-ductivityt+1 Labor Productivityt, respectively.Table 2 reports summary statistics on the variables used in

this study.12 On average, Swedish firms are profitable andprofitability increased over the sample period. Approxi-mately 23 percent and 31 percent, respectively, of the firm-

522 CORPORATE GOVERNANCE

Volume 21 Number 6 November 2013 2013 John Wiley & Sons Ltd

year changes in equity ownership involved foreign directand foreign portfolio investors; 16 percent involved control-seeking domestic investors; and in the remaining 30 percent,there was either no change in foreign ownership or thechange in ownership involved domestic portfolio investors.On average, Swedish firms employed almost 9,400 workersand the average excess vote of the largest domestic share-holder was 17.32 percent.

EMPIRICAL RESULTS

Univariate AnalysisTable 3 reports the bivariate correlations between changes infirm performance or productivity (dependent variables) andlevel of performance, ownership, voting rights, and size ofthe firm (independent variables). The negative correlationsbetween firm performance and future changes in perfor-mance, respectively, of -.4825, -.7172, and -.6654, indicatemean-reversions in firm performance that are statisticallysignificant at the .1 percent level. Moreover, the positivecorrelations between current productivity and futurechanges in productivity respectively, of .5189 and .4187, thatare statistically significant at the .1 percent level, imply apositive trend in firm productivity. Lastly, participation byforeign direct investors is positive and significantly corre-

lated with future changes in firm performance, and partici-pation by foreign portfolio investors is negative but notalways significantly correlated with future changes in per-formance. The correlations between increased participationby control-seeking domestic investors and changes in per-formance are negative though insignificant.Table 4 shows that all three alternative measures of per-

formance and both measures of productivity are positivelycorrelated and significant at the 1 percent level or higher. Inaddition, the significant positive correlations betweenforeign portfolio investors and firm performance, respec-tively, of .1059, .0565, and .0826, confirm that foreign portfo-lio investors are attracted to well-performing firms.This is not true of foreign direct investors. The negative

correlations, respectively, of -.0293 and -.0648 betweenforeign direct investors and productivity suggest thatforeign direct investors are attracted to firms with low pro-ductivity because of potential improvement. The correlationof firm size with current performance is significantly posi-tive. But as is evident in Table 3, the relationship betweensize and future changes in performance is insignificant.Lastly, firms dominated by a large domestic shareholderattract foreign portfolio investors but deter foreign directand control-seeking domestic investors. The positive corre-lation between the excess vote of the largest domestic share-holder and participation of foreign portfolio investors of

TABLE 2Summary Statistics

No. of firm-years Mean Standard deviation Min Max

ROAt 1512 .0112 .1480 -.7803 .4936ROEt 1512 .0299 .3281 -2.0738 1.3924EPSt 1512 5.2189 10.3212 -42.7807 52.2858DROAt,t+1 1353 .0013 .1296 -.7034 .7364DROEt,t+1 1353 .0046 .3154 -2.9621 2.8013DEPSt,t+1 1353 .3552 9.7142 -45.7407 51.0256F-Directt 1353 .2341 .4236 0 1F-Portfoliot 1353 .3115 .4633 0 1CSDt 1353 .1581 .3649 0 1Sizet 1512 9.3913 24.8464 .0010 80.3690Excess Votet 1512 17.3236 12.6806 -20.2% 50.0%F-Direct Capitalt 1353 8.3158 12.2174 0% 78.9%F-Portfolio Capitalt 1353 5.3258 11.6084 0% 89.2%Capital Intensityt 1512 1.0335 2.1533 .0054 34.1235Labor Productivityt 1509 2.0289 4.5026 .0210 75.5864DCapital Intensityt,t+1 1353 .0392 .0429 -4.5703 5.7383DLabor Productivityt,t+1 1329 .0992 .0551 -5.4481 5.8997

ROAt, ROEt, and EPSt, defined as Net Incomet divided by Average Total Assetst-1,t, Average Shareholders Equityt-1,t, and Average Number ofShares Outstandingt-1,t, respectively, are used as proxies of firm profitability. DROAt,t+1, DROEt,t+1, and DEPSt,t+1 denote future (t,t+1) one-yearchanges in profitability. F-Directt, F-Portfoliot, and CSDt are dummies denoting changes in equity associated with foreign direct investors,foreign portfolio investors, and control-seeking domestic investors, respectively. Number of employees (000s) is used as a surrogate forfirm Sizet. Excess Votet is the difference between ownership and voting percentages of the largest domestic shareholder. F-Direct Capitaltand F-Portfolio Capitalt are the ownership percentages of foreign direct and foreign portfolio investors. Capital Intensityt and LaborProductivityt are defined as Average Plant, Property, and Equipmentt-1,t divided by Average Number of Employeest-1,t. and Net Revenuet dividedby Average Number of Employeest-1,t. DCapital Intensityt,t+1 and DLabor Productivityt,t+1 denote future (t,t+1) one-year changes.

FOREIGN DIRECT INVESTORS AS CHANGE AGENTS 523

Volume 21 Number 6 November 2013 2013 John Wiley & Sons Ltd

.0920, and negative correlations between the excess vote ofthe largest domestic shareholder and participation of foreigndirect and control-seeking domestic investors respectively,of -.0639 and -.0901, are highly significant.

Multivariate AnalysisTwo-way fixed effects regressions, Yt+1 = Xbt + et, that controlfor both firm-specific characteristics and time are used toassess whether changes in equity investments by foreigndirect investors increase firm performance in the subsequentperiod. The dependent variable, Yt+1: Performancet+1 Perfor-mancet, utilizes ROAt, ROEt, and EPSt as surrogates for firmperformance. The explanatory variables, Xt, are: (1) currentchange in ownership reflected by the categorical dummyvariables F-Portfoliot, F-Directt, and CSDt; (2) number ofemployees to capture Sizet;13 (3) current year performance;(4) excess voting power of the largest domestic shareholderin the current year; and (5) capital ownership of foreigndirect and foreign portfolio investors for the current year.The change in the subsequent three-year average returnfrom the current year is used to examine the long-termimpact of the foreign direct investors.14The results in Table 5 indicate that only F-Directt, namely,

changes in equity investments by foreign direct investorsthat reduce the excess voting power of the largest domesticshareholder improve firm performance. In model 1, whereDROAt,t+1 is the change in firm performance, the F-Directtcoefficient of .0809 is significant at the .1 percent level. Inmodels 2 and 3, where the change in performance are DRO-Et,t+1 and DEPSt,t+1 respectively, the F-Directt coefficients .0845

and 2.9995, are also positive and highly significant. More-over, increased participation by foreign portfolio andcontrol-seeking domestic investors do not significantlyimprove andmay worsen firm performance. The coefficientsfor F-Portfoliot are insignificant in models 1 and 2; negativeand significant at the 5 percent level in model 3. The coeffi-cients for CSDt are insignificant and positive inmodels 1 and2; insignificant and negative in model 3.Further, the positive but insignificant coefficients for

F-Direct Capitalt confirms that participation by foreign directinvestors improves performance but only when there is aconcomitant decline in the excess voting power of the largestdomestic shareholder. Similarly, the negative coefficient forF-Portfolio Capitalt, which is statistically significant in model1 and insignificant in models 2 and 3, confirms thatincreased participation by foreign portfolio investors tendsto worsen firm performance.

Intensity of Foreign ParticipationIf foreign direct investors improve firm performance, theirimpact on firm performance should be greater the moreconsiderable is their involvement. To investigate this, wepartition F-Directt into three categories. F-Directt 5 percent,F-Directt 10 percent, and F-Directt 20 percent signifies thatforeign direct investors acquire between 5 percent and lessthan 10 percent of the votes, between 10 percent and lessthan 20 percent of the votes, and 20 percent or more of thevotes, respectively. Similarly, we partition F-Portfoliot into thesame three categories.

TABLE 3Bivariate Correlations between Dependent and Independent Variables

DROAt,t+1 DROEt,t+1 DEPSt,t+1 DCapital Intensityt,t+1 DLabor Productivityt,t+1

F-Directt .0732 (.01) .0015 (.06) .0735 (.01) .0439 (.04) .0385 (.07)F-Portfoliot -.0405 (.14) -.0048 (.86) -.0532 (.05) -.0160 (.46) .0337 (.12)CSDt -.0136 (.62) -.0127 (.64) -.0067 (.84) -.0037 (.87) -.0037 (.86)ROAt -.4825 (.00) .0652 (.02) -.2158 (.00) .0063 (.77) .0063 (.77)ROEt .1574 (.00) -.7172 (.00) -.1957 (.00) .0008 (.97) .0014 (.95)EPSt -.0629 (.02) -.1200 (.00) -.6654 (.00) -.0064 (.77) -.0007 (.97)Capital Intensityt -.0007 (.98) -.0071 (.94) .0054 (.80) .5189 (.00) .0465 (.02)Labor Productivityt .0110 (.61) .0130 (.55) .0269 (.21) .0472 (.03) .4187 (.00)Sizet -.0054 (.84) -.0011 (.97) -.0004 (.99) -.0161 (.45) -.0046 (.83)Excess Votet -.0215 (.43) -.0144 (.60) -.0304 (.26) .0142 (.51) -.0108 (.62)F-Direct Capitalt .0207 (.45) .0017 (.95) .0223 (.41) -.0031 (.89) -.0221 (.39)F-Portfolio Capitalt -.0890 (.00) -.0382 (.16) -.0096 (.72) .0179 (.40) -.0037 (.68)

Table 3 shows the correlations between the dependent variables (horizontal axis) and the independent variables (vertical axis).ROAt,ROEt,and EPSt, defined as Net Incomet divided by Average Total Assetst-1,t, Average Shareholders Equityt-1,t, and Average Number of SharesOutstandingt-1,t, respectively, are used as proxies of firmprofitability.DROAt,t+1,DROEt,t+1, andDEPSt,t+1denote future (t,t+1) one-year changesin profitability. F-Directt, F-Portfoliot, and CSDt are dummies denoting changes in equity associated with foreign direct investors, foreignportfolio investors, and control-seeking domestic investors, respectively. Number of employees (000s) is used as a surrogate for firm Sizet.Excess Votet is the difference between ownership andvoting percentages of the largest domestic shareholder. F-Direct Capitalt and F-PortfolioCapitalt are the ownership percentages of foreign direct and foreign portfolio investors. Capital Intensityt and Labor Productivityt are definedas Average Plant, Property, and Equipmentt-1,t divided by Average Number of Employeest-1,t and Net Revenuet divided by Average Number ofEmployeest-1,t. DCapital Intensityt,t+1 and DLabor Productivityt,t+1 denote future (t,t+1) one-year changes. p-values are shown in parentheses.

524 CORPORATE GOVERNANCE

Volume 21 Number 6 November 2013 2013 John Wiley & Sons Ltd

Table 6 shows the results of a two-way fixed-effects panelregression controlling for firm and year. Foreign portfolioinvestors do not significantly improve firm performanceregardless of how much voting control is acquired. Onlyincreased participation of foreign direct investors matters.Moreover, the greater is their level of participation, thelarger is the positive impact on firm performance. The coef-ficients are positive and larger as the level of participation byforeign direct investors increases, F-Directt 20 percent >F-Directt 10 percent > F-Directt 5 percent, and significant whenparticipation by foreign direct investors reach the 10 percentthreshold.

Long-Term Performance ImpactTo assess the permanence of improvements in firm per-formance that result from the participation of foreigndirect investors, we examine future three-year changes infirm performance relative to current firm performance asproxies for long-term firm performance. LTROAt,t+3, LTRO-

Et,t+3, and LTEPSt,t+3 are defined as 1 31

3

ROA ROAtt

t+=

,1 3

1

3

ROE ROEtt

t+=

, and 1 31

3

EPS EPStt

t+=

, respectively.Two-way fixed effects panel regressions controlling for firmand year are reported in Table 7.The results in Tables 5 and 7 are consistent. On average,

foreign direct investors are associated with long-termimprovements in firm performance. In all three models, thecoefficients for F-Directt are significantly positive at the 10percent level or better. In addition, note that the coefficientsof F-Portfoliot are always negative; and the coefficient ofCSDt, is positive in model 1, but negative in models 2 and 3.Though none of the coefficients are significant, the partici-pation of foreign portfolio or control-seeking domesticinvestors suggests an adverse impact on firm performance.

Origins of Foreign Investors15

A large literature, followingLaPorta, Lpezde Silanes, Shlei-fer and Vishnys Law and Finance (La Porta et al., 1998),provides convincing evidence to support the thesis thatBritish Common Law countries are best at protecting minor-ity investors and facilitating financial development. We tabu-late the countries of origin of foreign investors in our sample.Over 40 percent of all foreign investors are from the US andthe UK, the most prominent British Common Law countries.Investors from the US and the UK also represent a largemajority, nearly 70 percent, of foreign direct investors.To gauge the different effects of country of origin on

investor effectiveness in enhancing financial performance,we divide our sample of foreign direct investors into twogroups those from the US and the UK, and the rest. Table 8repeats the analysis of Table 5, but replaces the F-Direct vari-able with two new indicator variables, namely, US/UK-Directand Non-US/UK-Direct. As predicted by the legal origin lit-erature, increases in financial performance are associatedwith large, positive, and significant US/UK-Direct coeffi-cients. In only one case is the coefficient on Non-US/UK-Direct significant, although the signs are positive across allthree specifications.

TABLE4

Correlation

Matrix

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

F-D

irec

t t(1

)1.000

F-P

ortf

olio

t(2

)-.279(.0

0)C

SDt(3

)-.240(.0

0)-.292(.0

0)R

OA

t(4

)-.035(.1

8).106

(.00)

-.091(.0

0)R

OE

t(5

)-.008(.7

6).057

(.03)

-.066(.0

1).118

(.00)

EP

S t(6

)-.030(.2

5).083

(.00)

-.007(.7

8).395

(.00)

.284

(.00)

Cap

ital

Inte

nsit

y t(7

)-.029(.1

4).050

(.01)

.014

(.48)

.022

(.28)

.009

(.67)

.003

(.88)

Labo

rP

rodu

ctiv

ity t

(8)

-.065(.0

0).040

(.05)

-.002(.5

6).003

(.87)

-.005(.8

1)-.023(.2

5).061

(.00)

Size

t(9

).057

(.30)

.007

(.80)

-.002(.9

3).094

(.00)

.045

(.08)

.157

(.00)

-.029(.1

5)-.016(.4

3)E

xces

sV

ote t

(10)

-.064(.0

1).092

(.00)

-.090(.0

0).009

(.36)

.013

(.63)

.080

(.13)

-.021(.3

0)-.020(.3

2).067

(.01)

F-D

irec

tC

apit

alt(1

1).223

(.00)

-.166(.0

0)-.180(.0

0)-.026(.3

2)-.004(.8

8)-.008(.7

6)-.005(.8

1)-.071(.0

0).208

(.00)

-.116(.0

0)F-

Por

tfol

ioC

apit

alt(1

2)-.250(.0

0).280

(.00)

-.177(.0

0).044

(.17)

.015

(.57)

.034

(.19)

.005

(.80)

.023

(.34)

.186

(.00)

.050

(.05)

-.362(.0

0)

Table4repo

rtsthecorrelations

betw

eentheindep

enden

tvariables.R

OA

t,R

OE

t,an

dE

PS t,d

efine

das

Net

Inco

me tdivided

byA

vera

geT

otal

Ass

ets t-

1,t,

Ave

rage

Shar

ehol

ders

Equ

ity t

-1,t,

and

Ave

rage

Num

ber

ofSh

ares

Out

stan

ding

t-1,

t,resp

ective

ly,areus

edas

prox

iesof

firm

profi

tability.

DRO

At,t+1,DR

OE

t,t+1,an

dDE

PS t

,t+1den

otefuture

(t,t+

1)on

e-ye

arch

ange

sin

profi

tability.

F-D

irec

t t,F-

Por

tfol

iot,an

dC

SDtaredu

mmiesden

otingch

ange

sin

equity

associated

withforeigndirectinve

stors,

foreignpo

rtfolio

inve

stors,

andcontrol-seek

ing

dom

esticinve

stors,resp

ective

ly.N

umbe

rof

employ

ees(000s)

isus

edas

asu

rrog

ateforfirm

Size

t.E

xces

sV

ote tisthedifferenc

ebe

tweenow

nershipan

dvo

ting

percen

tage

sof

the

largestdom

esticshareh

older.F

-Dir

ect

Cap

ital

tan

dF-

Por

tfol

ioC

apit

altaretheow

nershippe

rcen

tage

sof

foreigndirectan

dforeignpo

rtfolio

inve

stors.

Cap

ital

Inte

nsit

y tan

dLa

bor

Pro

duct

ivit

y taredefi

nedas

Ave

rage

Pla

nt,P

rope

rty,

and

Equ

ipm

ent t-

1,tdivided

byA

vera

geN

umbe

rof

Em

ploy

ees t-

1,tan

dN

etR

even

uetdivided

byA

vera

geN

umbe

rof

Em

ploy

ees t-

1,t.DC

apit

alIn

tens

ity t

,t+1an

dDL

abor

Pro

duct

ivit

y t,t+

1den

otefuture

(t,t+

1)on

e-ye

arch

ange

s.p-values

areshow

nin

parenthe

ses.

FOREIGN DIRECT INVESTORS AS CHANGE AGENTS 525

Volume 21 Number 6 November 2013 2013 John Wiley & Sons Ltd

Table 9 repeats the analysis of Table 7, again with foreigndirect investors separated into two groups. US/UK-Directcoefficients are large, positive, and statistically significantacross all three measures of long-term performance; Non-US/UK-Direct coefficients are insignificant. In sum, theresults are consistent with the prevailing literature thatemphasizes the benefits of British legal origin in encourag-ing shareholder value creation and protecting minorityshareholders rights.

Sources of EfficiencyTwo-way fixed effects panel regressions controlling for firmand year reported in Table 10 consider labor productivityand capital intensity as potential sources of efficiency thatcontribute to improvements in firm performance. Thedependent variables in columns 1 and 2 are the one-yearfuture changes in revenue per employee and capital-laborratio, and in columns 3 and 4, the three-year future changesin revenue per employee and capital-labor ratio.The highly significant positive coefficients associated with

F-Directt in panel regressions 1 and 2 clearly show that onlythe participation of foreign direct investors increases laborproductivity and capital intensity. The involvements eitherby foreign portfolio or control-seeking domestic investorshave no impact on labor productivity or capital utilization.

Firms are more profitable through lower cost from betterdeployment of labor and capital. Moreover, the panel regres-sions in columns 3 and 4 show the future improvements inlabor and capital efficiency are long-term even after weaccount for current labor productivity and capital intensity.Table 11 goes further in identifying the sources of the

efficiency that foreign direct investors brought to Swedishfirms. In view of the results in Tables 8 and 9, foreign directinvestors are divided into two groups based on their coun-tries of origin, namely, US/UK-Direct and Non-US/UK-Direct.Table 11 shows a negative and statistically significant asso-ciation between US/UK-Direct and changes in labor, and therelation is evident in one-year as well as three-year horizons.US/UK direct investors also induce positive changes incapital (PPE), that are highly significant only in the longterm, but insignificant in the one-year period immediatelyfollowing entry of foreign investors.These results are consistent with Bjuggren and Bohman

(2006) and Holmn and Hgfeldts (2009), who find that theexercise of control by minority owners and pyramid owner-ship structures lead to overinvestment and loss of firm value,as well as with Jackson, Hopner, and Kurdelbusch (2005),who find that a change in orientation toward shareholdermaximization raised the profitability ofGermanfirms. Lastly,our results complement Giannetti and Laeven (2009), whofind that foreign pension funds improve firm performance.

TABLE 5Impact of Foreign Investors on Firm Performance

Dependent variable

DROAt,t+1 DROEt,t+1 DEPSt,t+1

F-Directt .0809*** (.001) .0845** (.010) 2.9995** (.003)F-Portfoliot -.0149 (.496) .0113 (.697) -1.9306* (.030)CSDt .0096 (.540) .0185 (.371) -.4044 (.524)Sizet -1.80E-05 (.973) -.0002 (.784) -.0183 (.407)Excess Votet -.0003 (.798) -.0007 (.611) .0420 (.344)F-Direct Capitalt .0015 (.105) .0016 (.197) .0512 (.164)F-Portfolio Capitalt -.0019* (.029) -.0016 (.165) -.0122 (.730)ROAt -.7191*** (.000)ROEt -.7403*** (.000)EPSt -.6004*** (.000)Constant .0131 (.666) .0392 (.328) 2.9215* (.019)R2 .3719 .4549 .3167Number of Firm-Years 1353 1353 1353Number of Firms 172 172 172

Table 5 reports two-way fixed effects regressions controlling for firm and year. DROAt,t+1, DROEt,t+1, and DEPSt,t+1 denote future (t,t+1)one-year changes in profitability. F-Directt, F-Portfoliot, and CSDt are dummies denoting changes in equity associated with foreign directinvestors, foreign portfolio investors, and control-seeking domestic investors, respectively. Number of employees (000s) is used as asurrogate for firm Sizet. ROAt, ROEt, and EPSt, defined as Net Incomet divided by Average Total Assetst-1,t, Average Shareholders Equityt-1,tdivided by Average Total Assetst-1,t, and Average Number of Shares Outstandingt-1,t, divided by Average Total Assetst-1,t, respectively, are usedas proxies of firm profitability. Excess Votet is the difference between ownership and voting percentages of the largest domesticshareholder. F-Direct Capitalt and F-Portfolio Capitalt are the ownership percentages of foreign direct and foreign portfolio investors.p-values are shown in parentheses.***, **, *, and denote significant at the .001, .01, .05, and .10 levels, respectively.

526 CORPORATE GOVERNANCE

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Their study, however, fails to differentiate between owner-ship and control. We show that changes in voting controlrather than ownership enhance firm performance.16

RobustnessA decrease in the excess vote of the largest domestic share-holder as a result of foreign involvement is insufficient byitself to improve firm performance. Reductions in excessvote must entail a voluntary acquiescence of control by thelargest domestic shareholders to foreign direct investors.Moreover, participation by control-seeking domestic share-holders is not a substitute. Instead, foreign direct investorscan be agents of change.To underscore these points, we examine two panel

datasets that focus on firm-years where there was a declinein the excess vote of the largest domestic shareholder. In thefirst dataset, declines in the excess vote of the largest domes-tic shareholder are associated with increases in ownershipand vote of foreign direct and control-seeking domesticinvestors. In the second dataset, declines in the excess vote of

the largest domestic shareholder are associated only withincreases in ownership and vote of control-seeking domesticinvestors that more than offset decreases in the ownershipand vote of foreign direct investors.In the panel regressions, the actual decreases in excess

vote percentages of the largest domestic shareholder aredenoted by ExcessVotet; increases and decreases of foreignvote percentages by F Votet + and F Votet , respectively;and increases in vote percentages of control-seekingdomestic investors by D Votet +. Interaction terms ExcessVote F Votet t + , ExcessVote F Votet t , and ExcessVote D Votet t + , reflect changes in the excess votepercentage of the largest domestic shareholder associatedwith changes in voting percentages of foreign direct andcontrol-seeking domestic investors.The two-way fixed effects panel regressions controlling for

firm and year in Table 12 confirm that a reduction in excessvote as a result of participation by foreign direct or control-seeking domestic investors is insufficient to improve firmperformance. The coefficients associated with excess voteand foreign vote are mostly positive but insignificant. More-

TABLE 6Intensity of Foreign Participation and Firm Performance

Dependent variable

DROAt,t+1 DROEt,t+1 DEPSt,t+1

F-Directt 5% .0335 (.266) .0086 (.813) 1.3992 (.209)F-Directt 10% .0840 (.059) .1139* (.031) 3.8938* (.023)F-Directt 20% .1530* (.012) .2136** (.006) 4.0896 (.068)F-Portfoliot 5% .0066 (.797) .0112 (.744) -.9690 (.349)F-Portfoliot 10% .0132 (.695) .0215 (.620) .0294 (.983)F-Portfoliot 20% -.0247 (.460) -.0501 (.247) -.7937 (.550)Sizet -.0001 (.903) -.0001 (.806) -.0157 (.370)Excess Votet .0002 (.678) .0001 (.917) -.0085 (.602)F-Direct Capitalt .0009 (.278) .0004 (.545) .0181 (.365)F-Portfolio Capitalt .0001 (.893) -.0085 (.614) -.2650 (.603)ROAt -.2686*** (.000)ROEt -.3198*** (.000)EPSt -.2591*** (.000)Constant -.0086 (.333) -.0203 (.299) 1.6867*** (.000)R2 .2275 .2246 .2241Number of Firm-Years 1353 1353 1353Number of Firms 172 172 172

Table 6 reports two-way fixed effects regressions controlling for firm and year. DROAt,t+1, DROEt,t+1, and DEPSt,t+1 denote future (t,t+1)one-year changes in profitability. F-Directt X%, F-Portfoliot X%, and CSDt X%, denote changes in equity associated with foreign directinvestors, foreign portfolio investors, and control-seeking domestic investors, respectively. Threshold percentages 5%, 10%, and 20%indicate the magnitudes of the change in voting rights associated with the level of involvement by foreign direct or portfolio investors andcontrol-seeking domestic investors and are defined respectively as 5% X% < 10%, 10% X% < 20%, 20% X%. Number of employees(000s) is used as a surrogate for firm Sizet. ROAt, ROEt, and EPSt, defined as Net Incomet divided by Average Total Assetst-1,t, AverageShareholders Equityt-1,t divided by Average Total Assetst-1,t, and Average Number of Shares Outstandingt-1,t, divided by Average Total Assetst-1,t,respectively, are used as proxies of firm profitability. Excess Votet is the difference between ownership and voting percentages of the largestdomestic shareholder. F-Direct Capitalt and F-Portfolio Capitalt are the ownership percentages of foreign direct and foreign portfolioinvestors. p-values are shown in parentheses.***, **, *, and denote significant at the .001, .01, .05, and .10 levels, respectively.

FOREIGN DIRECT INVESTORS AS CHANGE AGENTS 527

Volume 21 Number 6 November 2013 2013 John Wiley & Sons Ltd

over, greater participation by control-seeking domesticshareholders tends to lower rather than raise firm perfor-mance coefficients are mostly negative though insignifi-cant. Only when reductions in excess vote are accompaniedby increases in foreign direct investors vote does firm per-formance improve. Coefficients corresponding to theseinteraction terms are consistently positive and significant.These results indicate the critical importance of our classifi-cation of foreign investors as either direct or portfolioinvestors. Although not shown, distinguishing betweeninstitutional and non-institutional foreign investors does notimpact our results. The vast majority of both foreign portfo-lio and foreign direct investors are institutions and, conse-quently, institutional investor is not a characteristic thatdistinguishes foreign portfolio from foreign direct investors.

CONCLUDING REMARKS

A reversal in the decline in Swedish GDP per capita began in1994. Swedens GDP per capita growth between 1998 and2004 was the strongest amongst OECD nations. High pro-ductivity growth was cited as the primary explanation forthis positive development by McKinsey Global Institutes(2006) report Swedens economic performance: Recentdevelopment, current priorities. During this period, pro-ductivity growth in Swedens private sector ranked fourth

among OECD countries and was 1.5 times higher than theaverage. Swedens admission to the EU lowered trade bar-riers and the influx of foreign owners willingness to con-front labor unions enhanced the competitiveness of Swedishfirms. The result was an increase in output without a corre-sponding increase in labor input.17 The macroeconomictrends are consistent with the firm-level evidence we findin this study, which shows that improved firm performanceis associated with higher labor productivity and capitalintensity.As institutions theory predicts, foreign direct investors

can be agents of change in firms controlled by culturallyentrenched insiders. Foreign investors reorient corporategovernance goals without radically changing the formalrules and regulations that govern corporate choice andinstead effect changes in corporate culture by challengingthe informal rules of the game. Successful change can comeonly when large domestic shareholders, who are highlyentrenched and can obstruct change, are willing to relin-quish some control rights.Sweden was an ideal case for showing how economic

nationalism adapted to the pressures for trade and opencapital flows. Free trade expands markets for domesticfirms, which heightens product market competition. Capitalinflows by foreign investors intensify the global competitionfor resources, which advances corporate governance.What isremarkable in Sweden is that dominant owners of Swedens

TABLE 7Impact of Foreign Investors on Long-Term Firm Performance

Dependent variable

LTDROAt,t+3 LTDROEt,t+3 LTDEPSt,t+3

F-Directt .0385* (.019) .0403 (.075) 1.3520 (.087)F-Portfoliot -.0220 (.110) -.0261 (.168) -.5570 (.404)CSDt .0135 (.172) -.0028 (.836) -.7192 (.217)Sizet -.0001 (.840) -.0004 (.421) -.0239 (.155)Excess Votet -.0003 (.722) -.0013 (.218) -.0116 (.589)F-Direct Capitalt .0003 (.603) .0004 (.664) .0268 (.371)F-Portfolio Capitalt -.0007 (.224) -.0002 (.803) -.0119 (.662)ROAt -.8423*** (.000)ROEt -.8890*** (.000)EPSt -.4985*** (.000)Constant .0002 (.988) .0572** (.007) 2.8650*** (.000)R2 .3933 .3275 .2234Number of Firm-Years 1039 1039 1039Number of Firms 161 161 161

Table 7 reports two-way fixed effects regressions controlling for firm and year. LTDROAt,t+3, LTDROEt,t+3, and LTDEPSt,t+3 denote future(t,t+3) three-year average changes in profitability. F-Directt, F-Portfoliot, and CSDt, are dummies denoting changes in equity associated withforeign direct investors, foreign portfolio investors, and control-seeking domestic investors, respectively. Number of employees (000s) isused as a surrogate for firm Sizet. ROAt, ROEt, and EPSt, defined as Net Incomet divided by Average Total Assetst-1,t, Average ShareholdersEquityt-1,t divided by Average Total Assetst-1,t, and Average Number of Shares Outstandingt-1,t, divided by Average Total Assetst-1,t, respectively,are used as proxies of firm profitability. Excess Votet is the difference between ownership and voting percentages of the largest domesticshareholder. F-Direct Capitalt and F-Portfolio Capitalt are the ownership percentages of foreign direct and foreign portfolio investors.p-values are shown in parentheses.***, **, *, and denote significant at the .001, .01, .05, and .10 levels, respectively.

528 CORPORATE GOVERNANCE

Volume 21 Number 6 November 2013 2013 John Wiley & Sons Ltd

TABLE 8Impact of US/UK Foreign Direct Investors on Firm Performance

Dependent variable

DROAt,t+1 DROEt,t+1 DEPSt,t+1

US/UK-Directt .1488*** (.000) .0693* (.013) 6.9056*** (.000)Non-US/UK-Directt .0788*** (.001) .0175 (.280) .8831 (.506)F-Portfoliot -.0012 (.384) .0458 (.333) -.2376 (.771)CSDt -.0117 (.521) -.0756 (.216) -1.1219 (.287)Sizet -1.90E-05 (.970) -.0001 (.933) -.0321 (.281)Excess Votet -.0002 (.838) -.0028 (.420) .0773 (.200)F-Direct Capitalt .0019 (.090) .0062 (.101) .0596 (.144)F-Portfolio Capitalt -.0028*** (.001) -.0021 (.286) -.0685* (.044)ROAt -.6675*** (.000)ROEt -1.3010*** (.000)EPSt -.8597*** (.000)Constant -.0490* (.026) .1051 (.156) 2.5379* (.047)R2 .4289 .6819 .5888Number of firm-years 1353 1353 1353Number of firms 172 172 172

Table 8 reports two-way fixed effects regressions controlling for firm and year. DROAt,t+1, DROEt,t+1, and DEPSt,t+1 denote future (t,t+1) one-year changes in profitability.US/UK-Directt, Non-US/UK-Direct t, F-Portfoliot, and CSDt, denote changes in equity associated with foreign direct from the US/UK and those from other nations,foreign portfolio investors, and control-seeking domestic investors respectively. Number of employees (000s) is used as a surrogate for firm Sizet. ROAt, ROEt, andEPSt, defined as Net Incomet divided by Average Total Assetst-1,t, Average Shareholders Equityt-1,t divided by Average Total Assetst-1,t, and Average Number of SharesOutstandingt-1,t, divided by Average Total Assetst-1,t, respectively, are used as proxies of firm profitability. Excess Votet is the difference between ownership and votingpercentages of the largest domestic shareholder. F-Direct Capitalt and F-Portfolio Capitalt are the ownership percentages of foreign direct and foreign portfolioinvestors. p-values are shown in parentheses.***, **, *, and denote significant at the .001, .01, .05, and .10 levels, respectively

TABLE 9Impact of US/UK Foreign Direct Investors on Long-Term Firm Performance

Dependent variable

LTDROAt,t+3 LTDROEt,t+3 LTDEPSt,t+3

US/UK-Directt .0584*** (.000) .1246*** (.000) 5.834*** (.000)Non-US/UK-Directt -.0057 (.758) -.0239 (.565) -.4315 (.797)F-Portfoliot -.0027 (.821) .0074 (.781) .1719 (.874)CSDt -.0310 (.130) -.0437 (.177) .4557 (.728)Sizet -8.94E-05 (.806) -.0003 (.710) .0001 (.997)Excess Votet -.0017 (.404) -.0034 (.188) -.0501 (.528)F-Direct Capitalt -.0006 (.373) -.0022 (.117) -.0262 (.642)F-Portfolio Capitalt .0002 (.639) .0012 (.298) -.1170 (.114)ROAt -.2993*** (.000)ROEt -.2331*** (.000)EPSt -.2479*** (.000)Constant .0507 (.606) .0676 (.109) .3588 (.834)

R2 .5850 .4961 .2954Number of firm-years 1039 1039 1039Number of firms 161 161 161

Table 9 reports two-way fixed effects regressions controlling for firm and year. LTDROAt,t+3, LTDROEt,t+3, and LTDEPSt,t+3 denote future (t,t+3) three-year averagechanges in profitability. US/UK-Directt, Non-US/UK-Direct t, F-Portfoliot, and CSDt, denote changes in equity associated with foreign direct from the US/UK and thosefrom other nations, foreign portfolio investors, and control-seeking domestic investors respectively. Number of employees (000s) is used as a surrogate for firm Sizet.ROAt, ROEt, and EPSt, defined as Net Incomet divided by Average Total Assetst-1,t, Average Shareholders Equityt-1,t divided by Average Total Assetst-1,t, and Average Numberof Shares Outstandingt-1,t, divided by Average Total Assetst-1,t, respectively, are used as proxies of firm profitability. Excess Votet is the difference between ownership andvoting percentages of the largest domestic shareholder. F-Direct Capitalt and F-Portfolio Capitalt are the ownership percentages of foreign direct and foreign portfolioinvestors. p-values are shown in parentheses.***, **, *, and denote significant at the .001, .01, .05, and .10 levels, respectively.

FOREIGN DIRECT INVESTORS AS CHANGE AGENTS 529

Volume 21 Number 6 November 2013 2013 John Wiley & Sons Ltd

TABLE 10Sources of Efficiency

Dependent variable

DLabor Productivityt,t+1 DCapital Intensityt,t+1 LTDLabor Productivityt,t+3 LTDCapital Intensityt,t+3

F-Directt 279.2525** (.03) 194.9466*** (.00) 139.4983** (.04) 241.7478* (.10)F-Portfoliot 74.4233 (.49) -33.1217* (.10) 46.5038 (.39) -26.4265 (.28)CSDt 59.4255 (.62) 8.3270 (.76) 21.1869 (.76) -1.3698 (.41)Sizet .2594 (.94) -.1508 (.84) .1399 (.94) .3063 (.96)Excess Votet -2.2377* (.07) -.3176 (.84) -2.9872** (.04) .2780 (.81)F-Direct Capitalt 7.8998 (.12) .3985 (.64) -.3920 (.90) 2.0710 (.83)F-Portfolio Capitalt -6.7296 (.11) -5.8350*** (.00) -3.1831 (.16) -1.8168 (.83)Capital Intensityt .3617*** (.00) .1892*** (.00)Labor Productivityt .2376*** (.00) .4173*** (.00)Constant -64.9169 (.14) -174.8600*** (.00) -201.5610* (.07) -277.7420 (.25)R2 .2833 .3118 .2479 .2888Number of firm-years 1329 1353 1035 1046Number of firms 170 172 159 160

Table 10 reports two-way fixed effects regressions controlling for firm and year. Average Plant, Property, and Equipmentt-1,t divided by Average Number of Employeest-1,tand Net Revenuet divided by Average Number of Employeest-1,t are used as proxies for Capital Intensityt and Labor Productivityt, respectively. DCapital Intensityt,t+1 andDLabor Productivityt,t+1, are future (t,t+1) changes in capital intensity and labor productivity, LTDCapital Intensityt,t+3 and LTDLabor Productivityt,t+3 are future three-yearaverage changes in capital intensity and labor productivity. F-Directt, F-Portfoliot, and CSDt are dummies denoting changes in equity associated with foreign directinvestors, foreign portfolio investors, and control-seeking domestic investors, respectively. Number of employees (000s) is used as a surrogate for firm Sizet. ROAt,ROEt, and EPSt, defined as Net Incomet divided by Average Total Assetst-1,t, Average Shareholders Equityt-1,t divided by Average Total Assetst-1,t, and Average Number ofShares Outstandingt-1,t divided by Average Total Assetst-1,t, respectively, are used as proxies of firm profitability. Excess Votet is the difference between ownership andvoting percentages of the largest domestic shareholder. F-Direct Capitalt and F-Portfolio Capitalt are the ownership percentages of foreign direct and foreign portfolioinvestors. p-values are shown in parentheses.***, **, *, and denote significant at the .001, .01, .05, and .10 levels, respectively.

TABLE 11Impact of Foreign Direct Investors on Capital and Labor

Dependent variable

DLabort,t+1 DCapitalt,t+1 LTDLabort,t+3 LTDCapitalt,t+3

US/UK-Directt -.3294* (.016) .1161 (.564) -.1389* (.047) .4089** (.008)Non-US/UK-Directt .0313 (.493) .3493 (.376) .1144 (.161) -.0565 (.799)F-Portfoliot .0223 (.392) .5525 (.140) .0166 (.940) .2530 (.254)CSDt -.0373 (.265) -.183 (.527) -.0405 (.146) -.1380 (.402)Sizet -.0555*** (.000) .2385*** (.003) .0798*** (.000) .2012*** (.000)Excess Votet -.0038 (.841) -.0133 (.414) -.0088 (.599) -.0093 (.847)F-Direct Capitalt .0032 (.216) .0240 (.314) .0054 (.606) .0698 (.125)F-Portfolio Capitalt .0045 (.330) -.0119 (.244) .0147 (.134) .0656 (.259)Capital/Labort .0570 (.098) -.0574 (.796) .0144 (.148) -.4704 (.072)Constant -.6164 (.130) -.0173 (.624) -.3271 (.356) -.1022 (.626)R2 .2642 .1663 .2224 .2312Number of firm-years 1329 1329 1039 1039Number of firms 170 170 160 160

Table 11 reports two-way fixed effects regressions controlling for firm and year. Average Plant, Property, and Equipmentt-1,t and Average Number of Employeest-1,t are usedas proxies for Capital and Labor size, respectively. DCapitalt,t+1 and DLabort,t+1, are future (t,t+1) percentage changes in capital and labor size, LTDCapitalt,t+3 andLTDLabort,t+3 are future three-year average percentage changes in capital and labor size. US/UK-Directt, Non-US/UK-Direct t, F-Portfoliot, and CSDt denote changes inequity associated with foreign direct from the US/UK and those from other nations, foreign portfolio investors, and control-seeking domestic investors. Number ofemployees (000s) is used as a surrogate for firm Sizet. Excess Votet is the difference between ownership and voting percentages of the largest domestic shareholder.F-Direct Capitalt and F-Portfolio Capitalt are the ownership percentages of foreign direct and foreign portfolio investors. Capital/Labor ratios is constructed as AveragePlant, Property, and Equipmentt-1,t divided by Average Number of Employeest-1,t. p-values are shown in parentheses.***, **, *, and denote significant at the .001, .01, .05, and .10 levels, respectively.

530 CORPORATE GOVERNANCE

Volume 21 Number 6 November 2013 2013 John Wiley & Sons Ltd

TABLE12

Rob

ustnessTest

Pane

lADep

enden

tvariab

le

DRO

At,t+1

DRO

Et,t+1

DEP

S t,t+

1LT

DRO

At,t+3

LTDR

OE

t,t+3

LTDE

PS t

,t+3

FVote t

+.0008

(.645)

.0003

(.953)

.0624

(.566)

.0011

(.288)

.0006

(.399)

.1241

(.185)

DVote t

+.0007

(.634)

-.0023

(.474)

.0306

(.713)

-.0007

(.427)

-.0033

(.143)

-.0051

(.951)

ExcessV

ote t

.0034

(.220)

.0035

(.572)

.0862

(.588)

.0014

(.431)

.0027

(.603)

.0372

(.844)

ExcessV

ote

FVote

tt

+

.0013*

(.037)

.0036

(.069)

.0368

(.058)

.0011**

(.004)

.0044

(.087)

.0359*

(.016)

ExcessV

ote

DVote

tt

+

.0001

(.840)

-.0019

(.611)

-.0098

(.300)

-5.28E

-06(.9

74)

-8.7E-0

5(.8

48)

.0102

(.537)

Size

t.0001

(.825)

-.0001

(.940)

-.0168

(.639)

-3.14E

-07(.9

99)

-.0005

(.533)

-.0326

(.239)

Exc

ess

Vot

e t.0006

(.652)

-.0008

(.812)

.1662

(.530)

-.0019

(.156)

-.0048

(.141)

-.0897

(.302)

F-D

irec

tC

apit

alt

.0004

(.569)

-.0010

(.628)

.0176

(.737)

.0005

(.272)

-.0003

(.804)

.0225

(.587)

F-P

ortf

olio

Cap

ital

t-.0017

(.780)

.0003

(.842)

-.0817

(.420)

9.94E-0

5(.7

94)

2.29E-0

6(.9

98)

-.0413

(.240)

RO

At

-.5908***(.0

00)

-.7903***(.0

00)

RO

Et

-1.0178***

(.000)

-1.0149***

(.000)

EP

S t-.9763***(.0

00)

-1.0832***

(.000)

Con

stan

t-.0715

(.126)

.0604

(.538)

2.6662

(.294)

.0310

(.810)

.0156***

(.010)

1.0767**

(.007)

R2

712

712

712

523

523

523

Num

berof

firm-years

.3601

.4604

.5047

.4008

.4309

.5147

Num

berof

firms

161

161

161

147

147

147

Pane

lB

FVote t

+.0016

(.433)

.0015

(.760)

-.0227

(.857)

.0003

(.739)

.0010

(.839)

-.0193

(.946)

DVote t

+-.0024

(.126)

-.0034

(.367)

-.1505

(.115)

-.0013

(.383)

-.0068

(.280)

-.2550

(.111)

ExcessV

ote t

-.0029

(.386)

-.0022

(.780)

.2001

(.330)

.0001

(.937)

.0027

(.638)

.2685

(.229)

ExcessV

ote

FVote

tt

+

-.0004

(.507)

-.0009

(.555)

-.0147

(.700)

-.0005

(.148)

.0047

(.174)

-.1071

(.584)

ExcessV

ote

DVote

tt

+

5.28E-0

5(.8

01)

.0003

(.586)

-.0088

(.486)

-.0001

(.394)

-.0008

(.550)

-.0587

(.169)

Size

t1.07E-0

4(.9

03)

1.00E-0

4(.9

98)

.0020

(.970)

-2.45E

-05(.9

43)

6.82E-0

5(.9

80)

-.1330

(.217)

Exc

ess

Vot

e t-.0018

(.364)

-.0015

(.762)

.0489

(.692)

-.0023

(.270)

-.0028

(.395)

-.2403

(.153)

F-D

irec

tC

apit

alt

.0061

(.579)

.0033

(.900)

-.0321

(.962)

.0002

(.643)

.0184

(.170)

-.0868

(.830)

F-P

ortf

olio

Cap

ital

t-.0013

(.562)

2.86E-0

5(.9

96)

-.0032

(.998)

.0003

(.397)

.0007

(.401)

-.0048

(.984)

RO

At

-.9416***(.0

00)

-1.0238***

(.000)

RO

Et

-.6492***(.0

00)

-.9190***(.0

00)

EP

S t-1

.0294***

(.000)

-1.1388***

(.000)

Con

stan

t.0297

(.377)

.1249

(.118)

.0528

(.510)

.0325

(.034)

.0693

(.240)

1.0278

(.010)

R2

632

632

632

296

296

296

Num

berof

firm-years

.3566

.3314

.3010

.2966

.2846

.2506

Num

berof

firms

141

141

141

102

102

102

Table12

repo

rtstw

o-way

fixed

effectsregression

scontrolling

forfirm

andye

arfocu

sed