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The International Evidence on Performance and Equity Ownership by Insiders, Blockholders, and Institutions
Bruce Seifert (Contact author)
Department of Business Administration College of Business and Public Administration
Old Dominion University Norfolk, Va. 23529-0221
Telephone: (757) 683-3552 Fax: (757) 683-5639
E-mail [email protected]
Halit Gonenc Department of Finance
College of Economics and Administrative Sciences Hacettepe University
06530 Beytepe, Ankara Turkey Telephone: (90-312) 299 2064/129
Fax: (90-312) 299 2065 E-mail [email protected]
Jim Wright
Department of Business Administration College of Business and Public Administration
Old Dominion University Norfolk, Va. 23529-0221
Telephone: (757) 683-3520 Fax: (757) 683-5639
E-mail [email protected]
This paper examines the effects of equity ownership by insiders and equity ownership by blockholders and institutions on performance using samples of firms from four countries (United States, United Kingdom, Germany, and Japan). While there are no consistent relationships between insider ownership or blockholder/institutional ownership on performance across the four countries, there are nevertheless significant associations between ownership of these groups and performance within the four countries. Our results may indicate that the effects of insider ownership and/or blockholders/institutions depend very much on local laws or the local business environment. In contrast, the effects of the control factors on performance are much more consistent. Leverage, for example, tends to have a negative effect while capital expenditures and sales growth both generally have a positive effect.
G34 Corporate Governance G32 Ownership Structure G15 International Financial Markets
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The International Evidence on Performance and Equity Ownership by Insiders, Blockholders, and Institutions
I. INTRODUCTION
Equity ownership by managers and monitoring by large blockholders and institutions are two
ways that can potentially reduce agency problems and increase the value of the firm. Significant
equity ownership by managers can align their interests with those of outside shareholders so that
management has the incentive to pursue value-maximizing behavior. Also, the presence of large
blockholders or institutions can increase/improve the degree of monitoring and thus lead to better
firm performance. On the other hand, it is possible that too large an ownership stake by managers or
blockholders/institutions could potentially lead these groups to worry more about their own interests
and not those of outside shareholders. The empirical evidence about whether performance improves
due to equity ownership by managers and equity ownership of large blockholders/institutions is
unclear.
This paper examines these relationships under different ownership and control systems. In
particular, we examine the association between firm performance and equity ownership by insiders
and the relationship between firm performance and equity ownership by blockholders and
institutions using samples from four countries (United States, England, Germany, and Japan). All
four countries are very important in the world and, for the most part, have available data that allows
us to test our hypotheses. There is some debate on the extent of the differences in the governance
systems of these four countries. The traditional view argues that governance systems are different
between Anglo-American countries and those of Continental Europe and Japan. More recently,
researchers have suggested that distinctions between countries should be based more on their legal
systems (investor protection laws and their enforcement). In any case, our findings not only provide
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further evidence of these relationships for American firms, but also whether the relationships for
American firms are valid for firms in other important governance regimes.
Our paper is organized as follows. In section II, we highlight some of the relevant prior
research on equity ownership by insiders and blockholders. In section III, a description of the
ownership and control systems applicable for the firms in the four countries is given. In section IV,
hypotheses are stated, the data are described, and our methodology is presented. In section V, we
give our findings and finally, in section VI, conclusions are offered.
II. PRIOR RESEARCH
Theoretical Concerns
Agency problems exist when managers pursue activities such as excessive perk-taking or
maximizing sales or asset growth as opposed to shareholder wealth that benefit them at the expense
of outside shareholders. There are many ways to reduce this problem. Equity ownership by
managers helps to align their interests with those of outside shareholders. Substantial equity
ownership by institutions and blockholders encourages these groups to monitor managers more
carefully. The appointment of outside directors can also result in an increase in monitoring
activities. Debt financing not only reduces the free cash flow problem but it also encourages lenders
to monitor. The labor market for managers and the market for corporate control can motivate
managers to improve performance and thus reduce the agency problem.
Unfortunately, many of the mechanisms mentioned above to reduce the agency problem
create their own problems if used too much. Morck, Shleifer, and Vishny (1988) point out that when
managers own a substantial portion of the equity of a firm, they may feel entrenched (too secure in
their job status) and, as a result, they may not always pursue value-maximizing behavior. They
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might, for example, design very favorable compensation arrangements for themselves, pursue
projects that will benefit themselves and not outside investors, or conduct asset sales and transfer
pricing at prices that are favorable to themselves. Even worse, when management owns a substantial
amount of equity they may be able to retain their jobs even if they should be replaced. Institutions,
blockholders, and outside directors have their own separate interests, which can easily be different
from other outside shareholders. There may be times that these groups decide to cooperate with
managers to pursue strategies that do not maximize shareholder wealth. While debt can be used to
reduce agency problems, too much debt not only increases the risk of bankruptcy but also subjects
the firm to conflicts between shareholders and debtholders.1
A tentative conclusion from the previous discussion is that there may be an optimum amount
for many of the mechanisms used to reduce the agency problem between managers and shareholders.
Stulz (1988), in fact, develops a model that shows how the value of the firm first increases and then
decreases as the percentage of shares held by insiders increases.
Empirical Findings
There has been a fair amount of empirical literature devoted to whether the mechanisms used
to reduce agency problems affect the value of the firm. In this section we will concentrate on the
empirical literature concerning equity ownership by management and equity ownership by
blockholders and institutions, the two areas that we will subsequently investigate. Furthermore, we
will review primarily the findings in the U.S., U.K., Germany, and Japan because they are the
countries that we will examine empirically.
Morck, Shleifer, and Vishny (1988), Hermalin and Weisbach (1987), and McConnell and
Servaes (1990) all find significant, though different, curvilinear relationships between firm value and
1 One potential problem between shareholders and debtholders is that shareholders may start to prefer riskier projects
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the percentage of shares owned by corporate insiders. Morck, Shleifer, and Vishny (1988) find a
significant positive relationship between firm value and ownership by the Board of Directors when
board ownership is in the zero to five percent range and a significant negative relationship when
board ownership is in the five to twenty-five percent range. On the other hand, McConnell and
Servaes (1990) show a positive relationship between firm value and ownership by corporate insiders
when insiders own zero to somewhere between forty and fifty percent and a negative relationship
after that. In reviewing these studies, Loderer and Martin (1997) point out that while the
relationships found in these studies are often significant, they are nevertheless weak in terms of
explanatory power. In contrast to these studies, there are others that show no significant association
between value and equity ownership by insiders. Demsetz and Lehn (1985), for example, see no
significant relationship between profit (and by extension value) and ownership structure.2 These
authors argue that the reason why there is not a significant relationship between value and ownership
is because the best ownership level varies by firm. Demsetz and Villalonga (2001) suggest that
ownership structure is the product of decisions by many shareholders, all-trying to maximize their
wealth and, as a consequence, there is no systematic relationship between performance and
ownership structure.
The association between ownership and firm value has also been studied internationally.
Gorton and Schmid (2000), for example, find a positive association between firm value and insider
ownership in Germany, a finding consistent with an incentive effect. Short and Keasey (1999), on
the other hand, find a negative effect of ownership on firm value for U.K. firms after ownership
reaches 12%, a result consistent with an entrenchment effect. Using a sample of firms from eight
East Asian countries, Claessens, Djankov, Fan, and Lang (2003) find support for both incentive and
on the grounds that they can maximize their payoff at the expense of bondholders.
5
entrenchment effects. See Denis and McConnell (2003) for a summary involving many more
countries.
One difficulty with testing the relationship between equity ownership of managers and firm
performance is that equity ownership by managers is just one way to reduce agency costs and
theoretically all of the different mechanisms for reducing agency costs should be looked at
simultaneously (Agrawal and Knoeber, 1996).3 Another issue involves whether analyzing the effect
of equity ownership on firm performance should best be tested in a simultaneous equation
framework, an issue that will be addressed later. Unfortunately, the results using a simultaneous
equation framework seem partially dependent on model specification (see Himmelberg, Hubbard,
and Palia, 19994 and Barnhart and Rosentein, 1998).
A number of studies have examined whether blockholders and/or institutions affect the value
of the firm. McConnell and Servaes (1990) find a positive relationship between firm value and the
percentage of shares held by institutions5 but no significant association between firm value and
shares held by blockholders.6 Mehran (1995) finds no significant association between firm value
and blockholders. Holderness (2003) summarizes the evidence about blockholders and firm value in
the U.S. and argues that the relationship is not very strong. Holderness and Sheehan (1985),
Mikkelson and Ruback (1985), and Barclay and Holderness (1990) all report announcement gains
when outsiders purchase large amounts of stock, which may suggest that stockholders think that
2See also Holderness and Sheehan (1988) and Denis and Denis (1994). 3These authors point out that what is important is for the firm to use the optimal mix of mechanisms to reduce agency costs and not the optimal amount of any one mechanism on the assumption that that was the only mechanism available to reduce agency costs. 4Zhou (2001) questions the methodology of Himmelberg, Hubbard, and Palia (1999). 5Coffee (1991) indicates that over time institutional investors have switched from being passive investors to active ones. See also the general discussion in Bathala, Moon, and Rao (1994), where the authors show that institutional investors have used proxy contests many times to change management behavior. 6 Shleifer and Vishny (1986) propose a model where the existence of a large blockholder has a positive effect on the value of the firm.
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efficiency gains may be forthcoming.
The empirical evidence about the role of blockholders/institutions/monitors in other countries
is decidedly mixed. Some studies have focused on whether a large non-management shareholder
helps when there is a large controlling shareholder. La Porta, Lopez-de-Silanes, and Shleifer (1998)
report no net gains while Lins (2003) finds benefits in a study of emerging market countries. There
has also been considerable debate in the literature about the role of banks in both Germany and
Japan. Do these shareholders, in general, add value to the firm? Wenger and Kaserer (1998) argue
that German banks do not provide adequate monitoring of German companies for outside
shareholders but instead pursue objectives that benefit themselves. These authors argue that banks
can discourage companies from paying out cash or may force a negative NPV (net present value)
merger between a distressed and a nondistressed firm if the bank controls both firms. Grundfest
(1990), on the other hand, sees the role of German banks as positively influencing the operations of
German companies. Gorton and Schmid (2000) support that view and find that banks have a positive
influence on firm performance. Some Japanese scholars (Aoki, 1990; Prowse, 1992; and Sheard,
1989) argue that banks are important monitors and help to reduce agency costs. Other authors
(Hoshi, Kashyap, and Scharfstein, 1990 and Kaplan and Minton, 1994) contend that main banks are
especially helpful during times of financial distress. On the other hand, Weinstein and Yafeh (1998)
find that client firms of main banks do not perform better than other Japanese firms. These authors
believe that main banks discourage risk taking by their client firms in part because the banks are also
major debtholders of these firms.7 Also Weinstein and Yafeh contend that banks "overcharge" their
client firms for their services.
III. OWNERSHIP AND CONTROL SYSTEMS
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Governance Systems
Ownership and governance patterns vary between countries due to a number of factors
including laws, taxes, capital market characteristics, culture, history, and industrial organization.
For example, Thomsen and Pedersen (1996) find that the ownership structure of the 100 largest
companies in six European nations is influenced by the firm’s country, industry, and size.
It is reasonable to expect that different governance systems could influence the relationship
between firm performance and ownership by managers, blockholders or institutions. The literature
has tended to categorize governance systems according to two classifications: (1) bank-centered vs.
market-centered and (2) the degree of legal protection afforded to outside shareholders.
According to the first classification, differences in ownership patterns and governance
systems between countries can be classified into two system types (Kaplan, 1996). In market-based
systems such as the U.S. and U.K., managers are monitored and disciplined by the market to perform
in accordance with shareholder interests. In relationship-oriented systems such as Germany and
Japan, banks, large corporate shareholders, and other long-term intercorporate relationships carry out
the monitoring and disciplining functions.
Market-based systems such as the U.S. and U.K. are characterized by more dispersed
ownership, lower levels of shareholder involvement in direct corporate governance, relatively more
reliance upon equity financing, more fragmented and arms-length relationships with banks, Boards
of Directors not always independent of management, and more active takeover markets.8 On the
other hand, relationship or bank-centered systems tend to have more concentrated patterns of
ownership, more active involvement of shareholders in corporate governance matters, relatively
7 Morck and Nakamura (1999) believe that main banks act primarily to help creditors and, therefore, not necessarily shareholders. 8 It is important to note there are significant differences in corporate governance between the U.S. and the U.K. Short and Keasey (1999) point out, for example, that institutions in the U.K. have less restrictions placed on them in
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more reliance upon debt financing, longer-term and more relationship-oriented banking
arrangements, Board of Directors more independent of management, and less active takeover
markets.
Corporate ownership in the U.S. and the U.K. has been characterized as widely dispersed
with institutions the largest shareholders in the U.K. and individuals the largest shareholders in the
U.S. (Franks and Mayer, 1997). In Germany, the corporate sector (banks and, particularly, firms)
and families are the biggest shareholders and this has often been termed an "insider" system where
the corporate sector "controls" itself. The banks have even more power than the numbers of shares
they hold directly since they often vote the bearer shares they hold for their customers.9 In Japan,
Claesens, Djankov, and Lang (2000) report that using ten percent as the cutoff to define control,
forty-two percent of the firms in their sample are classified as widely held (no owner has more than
ten percent of the stock of the company). For those companies that are controlled, typically a
financial institution is the ultimate owner. For many Japanese firms their commercial bank, called
their main bank, plays a particularly important financial role for the firm. Also many Japanese firms
belong to a special industrial group (keiretsu), which influences many of their business
associations.10
La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000) argue that the distinction between
bank-centered and market-centered is not a good way to classify governance systems and instead
they suggest that to understand corporate governance systems it is necessary to know how well the
legal system (the laws and their enforcement) protects outside investors. When outside investors
supply funds to the controlling shareholders, they want to make sure that they will not only be repaid
terms of monitoring and that U.S. boards are also able to mount better takeover defenses than U.K. boards. 9 Nowak (2001) highlights some of the recent changes in the capital markets and in corporate governance in Germany. 10 See also Charkham (1994), Dimsdale and Prevezer (1994), Gedajlobic and Shapiro (1998), and Pedersen and
9
but also compensated for the time and risk of their investments. Unfortunately, in many countries
some expropriation is common.11 La Porta, Lopez-de-Silanes, Schleifer, and Vishny (1998) show
that in countries with low investor protection, firms generally have concentrated amounts of equity
ownership and that in these countries the agency conflict is between large and small equity owners.
In addition to helping explain ownership patterns, La Porta et al. (2000 and 2002) argue that the
legal system and its effectiveness has important implications for firm investment decisions, access to
external finance, dividend policies, and corporate valuation. La Porta et al. (2000) argue that, in
general, common law countries (for example, U.S. and England) offer greater protection than civil
law countries (for example, France and Germany). However, among civil law countries Germany
has stronger protection laws than France. These authors would argue that all four countries studied
in our research have reasonable investor protection laws.
IV. Hypotheses, Data, and Methodology
Hypotheses
We believe that if managers own stock in their own firms they will have an incentive to
maximize shareholder value and thus there should be an alignment of interests between managers
and outside shareholders. Many of our empirical tests examine the general impact of ownership by
insiders and we hypothesize that the impact should be positive. Some of our empirical tests allow us
to differentiate the impact of low levels of insider ownership from higher levels of insider
ownership. We believe that there should be a positive relationship between managerial stock
ownership and performance at low levels of insider ownership. Furthermore, we hypothesize that
the positive relationship between managerial ownership and performance at low levels of managerial
Thomsen (1997).
10
ownership will occur across different governance regimes and thus will be evident in all four
countries examined in our study.
On the other hand, at higher levels of managerial ownership, managers may become
entrenched and as a result may not pursue value-maximizing behavior. Therefore, at higher levels of
managerial ownership we argue that it is unclear which effect (entrenchment or alignment of
interests) will dominate and this should hold across all four countries in our study.
We hypothesize that the impact of ownership by either blockholders or institutions should
have a positive impact on performance. As the ownership levels increase for these two groups they
will have an increased incentive to monitor. Again we believe these relationships will hold across all
four countries.
Data Description
The data for this paper basically come from two sets of sources: (1) ownership information is
gathered from country-specific sources and (2) performance and control variables are obtained from
Worldscope. While Worldscope provides some ownership data, it only includes people or
companies who individually own more than five percent of the stock of a company and thus could
potentially exclude some very important information. For example, if there are three managers in a
company who each own four percent of the equity, then Worldscope would not list any of this
information and one might erroneously think that the managers did not own any of the equity of this
company. More detailed information can be gotten from various country-specific sources but
unfortunately this creates a couple of problems. First, not all sources provide the same information
(for example, information on blockholders) and second, variable definitions are inconsistent across
sources (for example, the definition of insiders). Therefore, we refrain from making many
11 In a similar vein, Claessens and Laeven (2003) show that the level of a country’s property rights influences the
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comparisons between countries. While the data may not be strictly comparable across countries, it is,
nevertheless, comparable within the same country. Thus we can still examine the impact of insider
ownership on performance for all four countries even though the definition of insiders is different for
the four countries.
Specifically, we gathered ownership information for the U.S. from Compact Disclosure,
which provides ownership information on institutions, blockholders, and insiders. According to the
SEC, the equity holdings of all institutions owning more than $100 million are added together and
constitute our institutional variable. Blockholders are people/institutions owning at least five
percent of the equity of the company and insiders are the holdings by directors, officers, and ten
percent shareholders.12 For the U.K., ownership information was retrieved from the website
www.hemscott.co.uk/equities/. This site lists directors and major shareholders. For insiders we
include all the shares held by directors. We label the variable noninisiders (which includes both
blockholders and institutions) as the total percentage held by major shareholders minus the percent
held by directors. For Germany, the source of the data is Hoppenstedt Aktienfuhrer. From here, we
derived the percent held by insiders as the percent owned by those on the management list and the
percent owned by someone who has the same family name as a manager of the company. From the
ownership information, we also calculated the percent owned by institutions and those by
blockholders (in this case, only individuals were classified as blockholders). For Japan, the source of
the data is the Japan Company Handbook. In this case we classified the ownership information into
the percent held by insiders, blockholders, employers, and foreign ownership.
Methodology
The most crucial issue surrounding the relationship between equity ownership and
investment decisions of firms. In particular, better property rights are associated with higher growth.
12
performance involves the endogeneity of a firm’s ownership structure. Some studies, for example,
Morck et al. (1988) and McConnell and Servaes (1990), have assumed the causality runs from
ownership to performance but not the other way around. Kole (1994) argues for reverse causality -
managers may want to receive compensation in the form of shares of stock when firm performance
is high. Demsetz and Villalonga (2001) and Cho (1998) argue that to properly test the effect of
ownership on firm performance it is necessary to allow for both the possibility that ownership can
affect performance but also that performance can influence ownership. If ownership is
endogenously determined, then OLS estimation will produce biased results and other techniques like
2SLS will result in better estimates of the relationship between ownership and performance. Since
the endogeneity issue is not clear-cut, our empirical results include OLS findings, tests for
endogeneity of ownership, and 2SLS results. The equations for the most general case of ownership
and performance being jointly determined are as follows:
Performance = f (ownership, leverage, capital expenditures, sales growth, and industry) Ownership = g (performance, leverage, capital expenditures, size, cash flow, risk)
We use a variation of Tobin’s Q (the ratio of the firm’s market value to the replacement cost
of its physical assets) as a proxy for firm value and/or firm performance. Our international data does
not allow us to compute precise measures of Tobin’s Q using Lindenberg and Ross’ (1981)
algorithm and hence we must use a variation of Tobin’s Q. Like Demsetz and Villalonga (2001) we
define Tobin’s Q as the ratio of year-end market value of common stock plus the book value of total
debt and preferred stock to the book value of total assets.
The selection of our control variables is dictated by the literature and data availability. In the
12 According to these definitions, insiders, blockholders, and institutions are not mutually exclusive.
13
equation for firm performance, we control for leverage, capital expenditures, sales growth, and
industry effects. According to the pecking order theory, profitability (performance) should be
negatively related to leverage (total debt to total assets). On the other hand, debt could be a proxy
for tax shields, which presumably would have a positive effect on profits. Capital expenditures
(scaled by total assets) can proxy for investment that should positively affect performance. We use a
firm’s five-year sales growth as a proxy for investment opportunities and this should also have a
positive influence on performance. Lastly, we also use dummies to capture the influence of
industries.
We control for leverage, capital expenditures, size, cash flow, and risk in the ownership
equation. It has often been argued that size should be negatively related to ownership since it is
harder to own the same percentage in a large firm as compared to a small firm. Like Cho (1998),
cash flow (divided by assets) is used as a proxy for liquidity. Capital expenditures are included as a
control variable to take into account the possible influence of investment on ownership. The effect
of risk on ownership could be negative or possible. On one hand, the greater the risk the more a
manager may want to diversify his or her ownership. On the other hand, greater risk may present
more opportunities for the manager to be able to exploit his or her inside knowledge to be able to
earn a profit.
We also present OLS results based on the equation for performance mentioned above. A
number of variations are also given. Some variations allow for a change in slope for the ownership
variable. This would be consistent, for example, with the theory that at some levels of equity
ownership the alignment effects could dominate while at other levels the entrenchment effects might
be the strongest. In some OLS regressions we use piecewise linear regression. An example of this
specification is as follows (for a single change in the slope coefficient for insider ownership using .1
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as the cutoff point):
Insider-1 = the equity ownership for insiders if the equity ownership < .1
= .1 if the combined equity ownership ≥ .1
Insider-2 = 0 if the combined equity ownership < .1
= the equity ownership minus .1 if the equity ownership of insiders ≥ .1
For example, if the equity ownership of insiders is equal to .14, then Insiders-1 = .1 and Insiders-2=
.04. Alternatively, to model the effect of insider ownership on performance, we use both insiders
and the square of insiders in the performance equation.
The effects of institutions and blockholders and noninsiders on performance are also tested
using both OLS and 2SLS. We model institutions, blockholders, and noninisiders as independent
variables in the context of our performance equations.
The intent of this paper is to examine a contemporaneous relationship between performance
and equity ownership of insiders, blockholders, and institutions. The ownership numbers are drawn
from publications dated 2000 for Japan and Germany, the Internet for the U.K. in 2000 or Compact
Disclosure for the U.S. in 2000. Presumably the data reflects information from a previous period,
probably for 1998 or 1999. As Zhou (2001) points out, typically ownership changes are small from
year to year within a single company. We take our performance and control variables from
Worldscope for the period 1997-1999. We use three-year averages to reduce the noise associated
with figures based on only one year of data. In short, we feel that our data represents a good test of a
contemporaneous relationship between performance and equity ownership of insiders, blockholders,
and institutions.
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V. RESULTS
We have organized our results by country. For each country we provide first summary
statistics for the important variables and second the regression results. As mentioned earlier, making
comparisons of some of the variables, especially the ownership variables, between countries are
difficult with our data since the data sources for ownership are all different. There is not, for
example, a standard definition used for insiders for all four countries.13 One observation common
to most of the ownership data is that the mean numbers tend to be larger than the median numbers,
suggesting that there are in each sample some firms with "very" large ownership on the part of
insiders, blockholders or institutions.
In the regression results we present on the left hand side of the each Panel the OLS results
and on the right hand side the corresponding 2SLS findings. For each country we present OLS
equations that assume the impact of insider ownership is constant over the entire range of equity
ownership and other equations that allow for one change in the slope coefficient of the ownership
variable. Unfortunately, with the available data, we were not able to develop a system of equations
for each country that would allow for a change in the slope coefficient for the insider variable and
still yield meaningful results (suitable F statistics etc.). In addition to the 2SLS results, we provide
Hausman tests for endogeneity of the ownership variable.14
U.S. Results
The regression results for the U.S. firms are presented in Panel A. The OLS results suggest
that at small (less than 10%) levels of insider ownership there is a negative relationship between
insider ownership and performance, a finding that is inconsistent with a positive alignment effect.
At higher levels of ownership there is no consistent significant relationship between ownership and
13This should not, however, be a major problem for our empirical results below since the same definition is used for
16
performance. The OLS results suggest that institutions have overall a positive effect while
blockholders have a negative effect (equations 4-6). In terms of the control variables, leverage has a
significantly negative effect; capital expenditures and sales growth have significantly positive
effects; and there are significant industry differences.
The two Hausman test results (on the residuals of the performance equation) are
contradictory (one indicates that insider ownership should be viewed as an endogenous variable
while the other suggests the opposite). The results of the 2SLS for the performance equation show
that overall there is a negative relationship between insider ownership and performance (equations 7
and 9). The 2SLS results suggest that the association between blockholders and institutions and
performance is just the opposite of the OLS results (institutions now have a negative effect while
blockholders a positive effect).15 In terms of the control variables, the 2SLS results are very close to
the OLS findings. Leverage has a negative effect; capital expenditures and sales growth have
positive influences. There are also industry differences.
The findings for the ownership equation suggest that the effect of performance on ownership
is unclear (in equation 10 there is a negative relationship while in equation 8 there is an insignificant
association). In terms of the control variables, size has a significantly negative influence on
ownership and the effects of leverage, cash flow, and risk are unclear.
German Results
Panel B presents the regression results for the German firms. The OLS results suggest that, in
general, (equations 1 and 4), as the equity ownership of insiders increases the performance of the
all firms in the same country. 14 See, for example, Woolridge (2000, pages 483-484). 15 Additional tests (both OLS and 2SLS) were performed because there is some overlap in the definitions between blockholders and institutions. In one series of tests we eliminated institutions from Panel A and reran all of the tests. Blockholders had a significantly negative effect on performance in the OLS tests but their effect on performance was insignificant in the 2SLS regressions.
17
firm improves, a finding consistent with Gorton and Schmidt (2000). This improvement in
performance seems concentrated at low levels of equity ownership (equations 2, 3, 5, and 6). There
is some evidence that at higher levels of ownership there is a negative relationship (equations 2 and
5 but not equations 3 and 6) between ownership and performance. There is some evidence that
blockholders have a significant positive effect on performance while institutions do not have a
significant effect. Leverage has a negative effect on performance; sales growth has a positive effect;
and capital expenditures have an insignificant effect. In addition, performance varies by industry.
The Hausman tests suggest that ownership is an endogenous variable and that 2SLS,
therefore, should be used for estimation. In the performance equation, insiders have a positive
influence on performance (equations 7 and 9). Also blockholders and institutions have a positive
effect (equation 9). Leverage has a negative effect on performance, capital expenditures an
insignificant effect, and the effect of growth in sales (investment opportunities) is unclear. For the
insider equations (equations 8 and 10) performance has a positive effect on equity ownership.
Insiders buy when the company performs well. As expected insiders own proportionately less of a
larger firm than they do of a smaller firm. Also the more debt, the greater is the amount of equity
ownership on the part of insiders. There are no significant effects from either capital expenditures or
cash flows on ownership.
U.K Results
Panel C gives the regression results for the U.K. sample. The OLS results indicate that
insider ownership generally has a negative effect (equations 1 and 4). The negative effect is clear at
low levels of insider ownership but the impact of ownership at higher levels is unclear. Noninsiders
have a significantly negative effect. In terms of control variables, leverage has a significantly
negative effect; both capital expenditures and sales growth have significantly positive effects; and
18
industry controls matter.
The Hausman results suggest that insiders is not an endogenous variable in the performance
equation. For the performance equation in the 2SLS results, insiders have a negative effect on
performance, similar to the OLS results. Noninsiders also have a negative effect. The control
variables all have the same signs as the OLS results. In terms of the insider equation, the effect of
performance is unclear (in equation 8 the coefficient is insignificant while in equation 10 the
coefficient is positive). In terms of the control variables, risk and size both have a negative impact
on insider ownership. The impact of leverage and cash flows are unclear.
Japanese Results
We report the results of the Japanese regressions in Panel D. The OLS findings show that
overall equity ownership by insiders has a significant positive effect on performance. The positive
effect appears to be concentrated at lower levels of ownership (equations 3 and 6) and there is some
suggestion that at very high levels of insider ownership the effect is negative (equations 2 and 5).
Blockholder ownership has an insignificant effect. Due to data availability, we also tested the
impact of foreign ownership and employee ownership on performance. Increased levels of foreign
ownership are associated with increased performance while there is a negative significant
relationship between employee ownership and performance. For the control variables, leverage and
capital expenditures have insignificant effects, sales growth a significantly positive effect, and
industry controls matter.
The two Hausman tests reveal contradictory results. One test indicates that insiders should
be considered endogenous while the conclusion from the other test suggests that insiders may not be
an endogenous variable. In the 2SLS results, the two equations (7 and 9) for performance indicate
the effect of insiders on performance is ambiguous (in one case there is a significant positive
19
coefficient and in the other case there is an insignificant coefficient). The effects of blockholders
(insignificant), employers (negative), and foreigners (positive) are the same as the OLS results. In
terms of the control variables, sales growth has a positive influence and performance varies by
industry. For the insider equations (8 and 10), higher levels of performance are associated with
greater insider ownership suggesting that insiders may buy additional stock when the company
performs well. For the control variables, leverage, cash flows, risk, and size all have a negative
effect on insider ownership.
Summary of Results
Our first question deals with the effect of equity ownership by insiders on performance. Our
empirical results show there is no universal (across the four countries) relationship between these
two variables. What does this mean? It could indicate that while there is no consistent relationship
across the four countries, there are nevertheless significant associations between performance and
insider ownership within the various countries. The overall impact of insiders on performance in the
U.S. and the U.K. is negative while it appears to be positive both in Germany and Japan. This line
of reasoning would suggest that ownership structure matters but it matters because of specific local
laws or the effects of other governance mechanisms in the specific country. Alternatively, our
findings may suggest that since there is no consistent relationship between performance and insider
ownership across our four countries, the effect of ownership on performance is minimal. This line of
reasoning would be consistent with Demsetz and Lehn (1985).
Tests for endogeneity of the ownership variable also do not indicate a clear pattern across the
four countries. Whether or not ownership is an endogenous variable, of course, has important
implications as to whether OLS or 2SLS should be used to test the effect of ownership on
performance. Fortunately, the results from the 2SLS regressions were fairly similar to those from
20
the OLS ones.
The effects of the control variables on performance are fairly consistent across the four
countries. Leverage has a negative effect on performance in three of the four countries (in Japan the
effect is insignificant). The effect of sales growth (as a proxy for investment opportunities) has a
positive influence on performance. There are also significant differences across industries when it
comes to performance. Capital expenditures have a positive effect on performance in the U.S. and
the U.K. and an insignificant effect in Germany and Japan.
The impact of blockholders and institutions on performance is clearly mixed. There is an
overall positive impact from both blockholders and institutions in Germany, a negative impact by
noninsiders in the U.K., and generally insignificant or unclear relationships in Japan and the U.S.
While not the focus of this paper, we also show a strong positive relationship between
foreign ownership of equity in Japan and performance. Additional research is needed to examine the
causal relationship: does foreign ownership encourage greater monitoring or are foreigners simply
attracted to better performing companies in Japan. Employee ownership is negatively related to
performance for Japanese firms.
In terms of the ownership equation, generally the higher the performance the greater is the
amount of insider ownership. As expected, size has a negative effect (the larger the firm the smaller
the percentage owned by insiders). Where significant, risk generally has a negative effect on
ownership.
VI. CONCLUSIONS
21
The purpose of this paper is to examine the influence of insiders, blockholders and
institutions on performance. The relationships between performance and equity ownership of
insiders, blockholders, and institutions are tested on samples of firms in the U.S., Germany, the
U.K., and Japan. The definitions for insiders, blockholders, and institutions differ across the four
countries, which makes it difficult to compare some of the results across the four countries.
The results show no consistent pattern between equity ownership by insiders and
performance across the four countries. This may suggest that that the relationship between equity
ownership and performance is weak, in general, a finding with which Demsetz and Lehn (1985)
would concur. On the other hand, it may indicate that this relationship is very dependent on
location. Specific local laws or governance practices may determine whether the relationship is
positive or negative or insignificant. Ultimately more research is needed to explain our findings.
The relationships between the control factors and performance are much more consistent. For
example, leverage tends to have a negative effect while capital expenditures and sales growth both
have a positive effect.
The influence of blockholders and institutions on performance is once again not consistent
across the four countries. This may again reflect the fact that their influence depends on their
location or it may suggest that their impact is, in general, small.
22
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26
TABLE 1: Summary Results and Regression Results
Each panel presents summary statistics and regression results for four countries – U.S. (Panel A), Germany (Panel B), U.K. (Panel C), and Japan (Panel D). The main performance (OLS and 2SLS) and ownership equations are as follows: Performance = a + b (ownership) + c (leverage) + d (capital expenditures) + e (sales growth) + f (industry dummies) + e Ownership = g + h (performance) + i (leverage) + j (capital expenditures) + k (size) + l (cash flow) + m (risk) + n (industry dummies) + u Performance is measured by a proxy (the market value of common stock plus the book value of total debt and preferred stock to the book value of total assets) for Tobin’s Q. Depending on the country, we have ownership measures for insiders, institutions, and blockholders. The natural logarithm of the three year average of total assets is used to define size. Leverage is measured as the three year average of the ratio of total debt to total assets. Risk is defined as the standard deviation of the return on assets (three years). Capital expenditures and cash flow are scaled by total assets. Performance and control variables are gathered from Worldscopefor the period 1997-1999 and ownership information is gotten from various publications dated 2000.
Panel A: U.S. Results
N MEAN STDDEV MINIMUM Q1 MEDIAN Q3 MAXIMUMT Q* 2198 1.583 1.828 0.008 0.426 0.836 1.967 9.992INSIDER 2198 0.182 0.222 0.000 0.018 0.091 0.276 1.000INSTITUTION 2198 0.322 0.281 0.000 0.057 0.266 0.549 1.000BLOCKHOLDER 2198 0.414 0.283 0.000 0.185 0.384 0.608 1.000CAPITAL EXP. 2198 0.053 0.072 -0.711 0.019 0.038 0.071 0.524CASH FLOWS 2198 0.021 0.229 -1.937 -0.011 0.075 0.134 1.483SIZE 2198 11.734 2.024 5.984 10.263 11.602 13.066 18.789S. GROWTH 2198 0.240 0.414 -0.726 0.027 0.129 0.302 2.939LEVERAGE 2198 0.472 0.229 0.010 0.280 0.480 0.640 1.000RISK 2198 0.101 0.182 0.000 0.018 0.044 0.109 3.424
27
OLS RESULTS 2SLS RESULTS 1 2 3 4 5 6 7 8 9 10 T Q T Q T Q T Q T Q T Q T Q INSIDER T Q INSIDER CONSTANT 2.54 2.56 2.65 2.55 2.54 2.62 2.89 0.56 4.56 0.71 (9.35)*** (9.4)*** (9.67)*** (9.46)*** (9.38)*** (9.63)*** (9.73)*** (15.8)*** (6.14)*** (17.9)***INSIDER -0.49 -0.88 0.18 0.26 -2.71 -15.24 (-3.07)*** (-2.03)** (1.05) (0.58) (-4.61)*** (-4.21)***INSIDER SQR. 0.53 -0.10 (0.97) (-0.19)INSIDER-1 -3.29 -1.69 (-3.18)*** (-1.62)*INSIDER-2 -0.10 0.43 (-0.46) (1.94)**INSTITUTION 0.96 0.97 0.93 -3.54 (7.18)*** (7.14)*** (6.90)*** (-3.25)***BLOCKHOLDER -0.85 -0.85 -0.84 2.75 (-6.53)*** (-6.52)*** (-6.44)*** (3.11)***T Q 0.01 -0.09 (0.70) (-8.82)***S. GROWTH 0.65 0.65 0.67 0.65 0.64 0.66 0.66 0.72 (7.62)*** (7.67)*** (7.87)*** (7.73)*** (7.70)*** (7.88)*** (7.45)*** (4.03)***CAPITAL EXP. 1.07 1.06 1.05 0.87 0.87 0.86 1.06 0.04 1.82 0.18 (2.18)** (2.17)** (2.13)** (1.79)* (1.79)* (1.78)* (2.07)** (0.54) (1.71)* (2.29)**LEVERAGE -2.88 -2.89 -2.92 -2.80 -2.79 -2.82 -2.90 0.11 -3.25 -0.23 (-18.8)*** (-18.8)*** (-19.0)*** (-18.4)*** (-18.3)*** (-18.5)*** (-18.1)*** (2.30)** (-9.49)*** (-5.39)***CASH FLOWS 0.12 -0.03 (4.07)*** (-1.02)RISK -0.03 0.14 (-0.90) (3.70)***SIZE -0.04 -0.02 (-12.3)*** (-7.23)***INDUSTRY YES YES YES YES YES YES YES YES N 2198 2198 2198 2198 2198 2198 2198 2198 2198 2198ADJ. R SQUARE 0.21 0.21 0.21 0.24 0.24 0.24 0.20 0.08 0.07 0.09F STATISTIC (54.72)*** (50.24)*** (50.93)*** (53.69)*** (49.83)*** (50.14)*** (51.39)*** (33.2)*** (13.09)*** (36.01)***HAUSMAN TEST (2.31)*** (-.01) (.26) * T Q = Tobin’s Q
28
Panel B: Germany Results
N MEAN STDDEV MINIMUM Q1 MEDIAN Q3 MAXIMUMT Q 319 1.286 1.433 0.078 0.591 0.833 1.326 9.425INSIDER 319 0.192 0.296 0.000 0.000 0.000 0.451 1.000BLOCKHOLDER 319 0.022 0.104 0.000 0.000 0.000 0.000 1.000INSTITUTION 319 0.486 0.373 0.000 0.066 0.503 0.853 1.000CAPITAL EXP. 319 0.069 0.061 0.000 0.032 0.052 0.086 0.416CASH FLOWS 319 0.086 0.086 -0.461 0.056 0.085 0.122 0.565SIZE 319 12.998 1.980 7.627 11.611 12.772 14.201 19.674S. GROWTH 319 0.122 0.238 -0.335 -0.006 0.066 0.171 1.842LEVERAGE 319 0.210 0.188 0.000 0.036 0.179 0.358 0.762RISK 319 0.035 0.052 0.000 0.008 0.018 0.045 0.423
29
OLS RESULTS 2SLS RESULTS 1 2 3 4 5 6 7 8 9 10 T Q T Q T Q T Q T Q T Q T Q INSIDER T Q INSIDER CONSTANT 3.29 3.30 3.35 3.31 3.13 3.17 3.19 0.27 2.03 0.23 (5.81)*** (5.87)*** (5.94)*** (5.51)*** (5.25)*** (5.30)*** (4.43)*** (2.12)** (2.2)** (1.78)*INSIDER 0.51 2.26 0.52 2.65 3.39 3.16 (2.42)** (3.19)*** (1.73)* (3.16)*** (2.50)*** (2.33)**INSIDER SQR. -2.23 -2.47 (-2.58)*** (-2.72)***INSIDER-1 5.66 6.93 (-2.46)** (2.68)***INSIDER-2 -0.28 -0.19 (-0.69) (-0.46)BLOCKHOLDER 0.95 1.13 1.20 2.44 (1.58) (1.90)* (2.00)*** (2.44)**INSTITUTION -0.004 0.22 0.26 1.56 (-0.02) (0.84) (0.96) (1.89)*T Q 0.09 0.11 (5.13)*** (6.11)***S. GROWTH 1.50 1.38 1.40 1.50 1.40 1.43 0.60 1.43 (5.19)*** (4.72)*** (4.81)*** (5.09)*** (4.78)*** (4.88)*** (1.08) (4.33)***CAPITAL EXP. -0.42 -0.45 -0.35 -0.38 -0.42 -0.31 -1.67 0.25 -0.99 0.24 (-0.43) (-0.46) (-0.36) (-0.39) (-0.43) (-0.32) (-1.22) (0.89) (-0.87) (0.84)LEVERAGE -1.51 -1.55 -1.60 -1.55 -1.55 -1.60 -1.92 0.22 -1.41 0.24 (-4.76)*** (-4.93) (-5.03)*** (-4.81)*** (-4.87)*** (-5.01)*** (-4.31)*** (2.51)*** (-3.84)*** (2.67)***CASH FLOWS 0.17 0.13 (0.77) (0.58)RISK -0.58 -0.71 (-1.54) (-1.87)*SIZE -0.02 -0.02 (-2.25)** (-2.01)**INDUSTRY YES YES YES YES YES YES YES YES N 319 319 319 319 319 319 319 319 319 319ADJ. R SQUARE 0.48 0.49 0.49 0.48 0.50 0.49 0.37 0.11 0.43 0.14F STATISTIC (28.01)*** (26.7)*** (26.43)*** (23.99)*** (23.27)*** (23.1)*** (17.63)*** (7.83)*** (19.47)*** (9.57)***HAUSMAN TEST (-2.47)*** (-.06)** (-2.54)***
30
Panel C: U.K. Results
N MEAN STDDEV MINIMUM Q1 MEDIAN Q3 MAXIMUMT Q 674 1.392 1.245 0.079 0.683 0.965 1.580 8.525INSIDER 674 0.111 0.161 0.000 0.004 0.033 0.160 0.912NONINSIDER 674 0.364 0.196 0.030 0.210 0.351 0.494 0.938CAPITAL EXP. 674 0.067 0.066 0.000 0.028 0.047 0.083 0.526CASH FLOWS 674 0.079 0.147 -1.417 0.049 0.095 0.142 0.640SIZE 674 11.328 1.885 7.078 10.019 11.106 12.425 17.826S. GROWTH 674 0.170 0.309 -0.422 -0.005 0.093 0.250 1.950LEVERAGE 674 0.187 0.157 0.000 0.044 0.168 0.286 0.917RISK 674 0.069 0.130 0.000 0.013 0.032 0.073 1.808
31
OLS RESULTS 2SLS RESULTS 1 2 3 4 5 6 7 8 9 10 T Q T Q T Q T Q T Q T Q T Q INSIDER T Q INSIDERCONSTANT 1.18 1.27 1.34 1.68 1.74 1.77 1.26 0.55 1.58 0.49 (3.59)*** (3.83)*** (4.01)*** (5.01)*** (5.14)*** (5.23)*** (3.73)*** (13.8)*** (4.49)*** (10.3)***INSIDER -0.96 -2.36 -1.50 -2.52 -1.69 -0.99 (-3.35)*** (-3.05)*** (-5.02)*** (-3.31)*** (-2.44)** (-1.71)*INSIDER SQR. 2.57 1.90 (1.94)** (1.46)INSIDER-1 -4.09 -3.70 (-3.09)*** (-2.85)***INSIDER-2 -0.21 -0.94 (-0.50) (-2.14)**NONINSIDER -1.28 -1.25 -1.22 -1.14 (-5.35)*** (-5.19)*** (-5.07)*** (-4.17)***T Q 0.01 0.08 (0.90) (4.45)***S. GROWTH 0.52 0.57 0.57 0.48 0.52 0.52 0.54 0.47 (3.39)*** (3.67)*** (3.74)*** (3.21)*** (3.41)*** (3.45)*** (3.49)*** (3.14)***CAPITAL EXP. 2.59 2.52 2.47 2.60 2.55 2.52 2.61 -0.02 2.58 -0.18 (3.68)*** (3.59)*** (3.52)*** (3.77)*** (3.70)*** (3.65)*** (3.69)*** (-0.21) (3.74)*** (-1.55)LEVERAGE -1.19 -1.25 -1.24 -1.20 -1.25 -1.24 -1.27 0.04 -1.15 0.11 (-4.09)*** (-4.29)*** (-4.29)*** (-4.23)*** (-4.37)*** (-4.36)*** (-4.23)*** (1.00) (-3.97)*** (2.11)**CASH FLOWS 0.09 0.05 (2.07)** (0.93)RISK -0.14 -0.22 (-2.89)*** (-3.72)***SIZE -0.04 -0.04 (-12.7)*** (-10.6)***INDUSTRY YES YES YES YES YES YES NO YES N 674 674 674 674 674 674 674 674 674 674ADJ. R SQUARE 0.13 0.13 0.13 0.16 0.16 0.16 0.12 0.19 0.14 0.16F STATISTIC (9.92)*** (9.44)*** (9.65)*** (11.86)*** (11.13)*** (11.21)*** (9.35)*** (27.19)*** (9.96)*** (21.8)***HAUSMAN TEST (.77) (-.03)* (-.80)
32
Panel D: Japan Results
N MEAN STDDEV MINIMUM Q1 MEDIAN Q3 MAXIMUMT Q 1015 0.837 0.618 0.137 0.547 0.719 0.892 8.434INSIDER 1015 0.024 0.066 0.000 0.000 0.000 0.000 0.554BLOCKHOLDER 1015 0.381 0.153 0.064 0.262 0.343 0.496 0.800EMPLOYER 1015 0.008 0.018 0.000 0.000 0.000 0.000 0.153FOREIGN 1015 0.068 0.096 0.000 0.006 0.026 0.093 0.705CAPITAL EXP. 1015 0.042 0.037 0.000 0.017 0.033 0.057 0.407CASH FLOWS 1015 0.032 0.050 -0.491 0.013 0.036 0.057 0.264SIZE 1015 18.345 1.430 14.187 17.305 18.131 19.199 23.411S. GROWTH 1015 0.005 0.079 -0.308 -0.038 -0.007 0.034 0.831LEVERAGE 1015 0.329 0.208 0.000 0.156 0.319 0.476 0.922RISK 1015 0.018 0.026 0.000 0.005 0.010 0.022 0.293
33
OLS RESULTS 2SLS RESULTS 1 2 3 4 5 6 7 8 9 10 T Q T Q T Q T Q T Q T Q T Q INSIDER T Q INSIDERCONSTANT 0.99 0.97 0.97 0.97 0.94 0.94 1.05 0.19 0.71 0.19 (5.25)*** (5.17)*** (5.16)*** (5.05)*** (4.90)*** (4.86)*** (5.28)*** (6.64)*** (3.11)*** (6.71)***INSIDER 0.50 1.63 0.72 2.03 -1.42 3.75 (1.78)* (2.59)*** (2.50)*** (3.21)*** (-0.91) (2.82)***INSIDER SQR. -3.67 -4.14 (-2.00)** (-2.32)**INSIDER-1 1.54 2.02 (2.17)** (2.84)***INSIDER-2 -0.22 -0.13 (-0.41) (-0.25)BLOCKHOLDER -0.13 -0.10 -0.10 0.24 (-1.06) (-0.84) (-0.81) (1.17)EMPLOYEE -3.00 -3.11 -3.10 -4.49 (-2.93)*** (-3.04)*** (-3.03)*** (-3.59)***FOREIGN 1.30 1.32 1.32 1.54 (6.67)*** (6.76)*** (6.78)*** (6.72)***T Q 0.05 0.04 (4.69)*** (4.85)***S. GROWTH 2.40 2.38 2.38 2.11 2.08 2.08 2.63 1.75 (9.97)*** (9.87)*** (9.87)*** (8.91)*** (8.79)*** (8.78)*** (8.62)*** (5.98)***CAPITAL EXP. 0.58 0.59 0.60 0.38 0.37 0.39 0.59 0.04 0.24 0.04 (1.15) (1.17) (1.19) (0.76) (0.76) (0.79) (1.15) (0.63) (0.45) (0.61)LEVERAGE -0.02 -0.01 -0.01 0.07 0.09 0.09 -0.08 -0.02 0.20 -0.02 (-0.21) (-0.07) (-0.09) (0.84) (1.02) (1.01) (-0.80) (-1.99)** (1.87)* (-2.03)**CASH FLOWS -0.17 -0.14 (-2.24)** (-2.02)**RISK -0.33 -0.30 (-2.76)*** (-2.60)***SIZE -0.01 -0.01 (-6.35)*** (-6.35)***INDUSTRY YES YES YES YES YES YES YES YES N 1015 1015 1015 1015 1015 1015 1015 1015 1015 1015ADJ. R SQUARE 0.15 0.15 0.15 0.20 0.20 0.20 0.14 0.06 0.18 0.06F STATISTIC (16.71)*** (15.7)*** (15.55)*** (18.65)*** (17.84)*** (17.72)*** (15.76)*** (11.11)*** (16.99)*** (11.58)***HAUSMAN TEST (4.04)*** (-04)*** (-2.48)
34
35
