The question if and how the ownership structure influences the market value of a firm is one of the most extensive studied subjects in corporate governance. Three main determinants were identified during more than 30 years of research:
1. The size of the block
2. The legal and regulatory environment
3. The type of blockholder
This work uses the acquisition of voting blocks by different types of acquirers (point 3) to determine how the shareholder structure in Germany (point 2) influences the valuation of a firm. It is demonstrated that the heterogeneity between block acquirers has to be taken into account, i.e. the size of a block (acquisition) itself (point 1) is not a distinctive enough instrument to determine valuation aspects.
The main results are that a block acquisition by banks in Germany results in a negative value effect. A cumulated abnormal return (CAR) of -2.7% in the event-period [-20,20] is the (average) consequence of a block-acquisition by a bank. A strong and highly significant result is the positive valuation effect when hedge funds acquire blocks in their targets. Average cumulated abnormal return is 5% in the period [-20,-1]. Corporations as
block-acquirer cause also positive CAR’s (1%). No significant effects are found following the announcement by mutual funds, insurances and individual investors.
The work proceeds as follows: In chapter 2 the literature on general corporate governance and especially the literature concerned with the relation between shareholder structure and valuation is reviewed. The data for this study and its legal sources is described in chapter 3 and chapter 4 gives a short descriptive statistic. The main chapter, chapter 5, starts with an explanation why the event-study methodology is especially eligible to answer the question of how blockholding influences valuation. Then the used methodology is
described and the results of the empirical work presented. These are put in the context of the respective literature and research. Chapter 6 is a short summary of the most important
findings and concludes the work.
Table of Content
1. Introduction
2. Corporate Governance, Shareholder Structure and Valuation
3. Legal Background and Data
3.1 Legal Background
3.2 The Events
3.3 The Acquirer-Groups
3.4 Research on Block-Magnitude
4. Descriptive statistic
5. Event Study
5.1 Methodology
5.2 Results
5.2.1 By Acquirer Group
5.2.1.a Mutual Fund
5.2.1.b Corporation
5.2.1.c Bank
5.2.1.d Individual Investor
5.2.1.e Insurance
5.2.1.f Hedge Fund
5.2.1.g Private Equity
5.2.2 By Size of Acquired Block
5.2.2.a Blocksize 3% - 5%
5.2.2.b Blocksize 5% - 10 %
5.2.2.c Blocksize 10% - 15%
5.2.2.d Blocksize 15% - 20%
5.2.2.e Blocksize 20% - 25%
5.2.2.f Blocksize 25% - 30%
6. Concluding Remark
Appendix
References
List of tables
Table 1: Represented equity at the annual meeting held by DAX companies
Table 2: Distribution of events by acquiring group and block sizes
Table 3: Acquirer groups represented in block-magnitude groups
Table 4: CAR’s and test statistics for different time-horizons for mutual funds
Table 5: Chart of CAR over the whole event-period [-20,20] for mutual funds
Table 6: CAR’s and test statistics for different time-horizons for corporations
Table 7: Chart of CAR over the whole event-period [-20,20] for corporations
Table 8: CAR’s and test statistics for different time-horizons for banks
Table 9: Chart of CAR over the whole event-period [-20,20] for banks
Table 10: CAR’s and test statistics for different time-horizons for individual investors
Table 11: Chart of CAR over the whole event-period [-20,20] for individual investors
Table 12: CAR’s and test statistics for different time-horizons for insurances
Table 13: Hedge fund events in the time period 1995-2007
Table 14: CAR’s and test statistics for different time-horizons for hedge funds
Table 15: Chart of CAR over the whole event-period [-20,20] for hedge funds
Table 16: CAR’s and test statistics for different time-horizons for private equity investors... 31 Table 17: Chart of CAR over the whole event-period [-20,20] for private equity investors
Table 18: Literature overview
Table 19: CAR’s and test statistics for different time-horizons for blocksize 3% - 5%
Table 20: CAR’s and test statistics for different time-horizons for blocksize 5% - 10%
Table 21: Chart of CAR over the whole event-period [-20,20] for blocksize 5% - 10%
Table 22: CAR’s and test statistics for different time-horizons for blocksize 10% - 15%
Table 23: Chart of CAR over the whole event-period [-20,20] for blocksize 10% - 15%
Table 24: CAR’s and test statistics for different time-horizons for blocksize 15% - 20%
Table 25: CAR’s and test statistics for different time-horizons for blocksize 20% - 25%
Table 26: CAR’s and test statistics for different time-horizons for blocksize 25% - 30%
1. Introduction
The question if and how the ownership structure influences the market value of a firm is one of the most extensive studied subjects in corporate governance. Three main determinants were identified during more than 30 years of research:
1. The size of the block
2. The legal and regulatory environment
3. The type of blockholder
This work uses the acquisition of voting blocks by different types of acquirers (point 3) to determine how the shareholder structure in Germany (point 2) influences the valuation of a firm. It is demonstrated that the heterogeneity between block acquirers has to be taken into account, i.e. the size of a block (acquisition) itself (point 1) is not a distinctive enough instrument to determine valuation aspects
The main results are that a block acquisition by banks in Germany results in a negative value effect. A cumulated abnormal return (CAR) of -2.7% in the event-period [- 20,20] is the (average) consequence of a block-acquisition by a bank. A strong and highly significant result is the positive valuation effect when hedge funds acquire blocks in their targets. Average cumulated abnormal return is 5% in the period [-20,-1]. Corporations as block-acquirer cause also positive CAR’s (1%). No significant effects are found following the announcement by mutual funds, insurances and individual investors
The work proceeds as follows: In chapter 2 the literature on general corporate governance and especially the literature concerned with the relation between shareholder structure and valuation is reviewed. The data for this study and its legal sources is described in chapter 3 and chapter 4 gives a short descriptive statistic. The main chapter, chapter 5, starts with an explanation why the event-study methodology is especially eligible to answer the question of how blockholding influences valuation. Then the used methodology is described and the results of the empirical work presented. These are put in the context of the respective literature and research. Chapter 6 is a short summary of the most important findings and concludes the work
2. Corporate Governance, Shareholder Structure and Valuation
“How do the suppliers of finance get managers to return some of the profits to them? [] At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward.”1
This is the main question in the field of corporate governance research, formulated by Andrei Shleifer and Robert Vishny in their literature overview from 1997. But these questions were first asked more than 60 years before by Adolf Berle and Gardiner Means in 1932. They were the first to describe the separation of ownership of a company in the form of shareholding and the control over a company’s daily business by the management. They assume a widely dispersed shareholding structure which leads to small incentives for the single shareholder to control. The idea can be followed back even longer: Adam Smith warned, following Holderness (2003), “in Wealth of Nations about the ‘negligence and profusion’ that will result when those who manage enterprises are ‘rather of other people’s money than of their own’.” [p. 51]
Today’s research about Corporate Governance started with the seminal paper of Jensen and Meckling in 1976. They developed a new “theory of the firm” (so the title of the work) based on the new framework of information asymmetry, which was most prominently developed by Stigler (1961) and Akerlof (1970). The great finding by Jensen and Meckling was the definition of “the concept of agency costs” [p.305]. There is an agency problem inside the firm due to the separation of ownership and control. They investigated “the nature of the agency costs” [p. 305] and “demonstrate who bears this costs and why” [p.305]
Corporate Governance Research examines those mechanisms that have the potential to reduce this asymmetry. The consequences of smaller asymmetries are higher valuations for the companies because the shareholders can be more sure that the management’s interests are aligned with their own, i.e. the maximization of the firm value
In this work I examine one of the oldest and most extensive examined questions2 in the field of Corporate Governance:
What is the influence of the shareholder structure on the valuation of firms?
In more than 30 years of research three main determinants for the interaction between the shareholder structure and the valuation of a firm could be identified:
1. The size of the block
The early studies in the 1980’s examined the pure magnitude of shareholdings, i.e., how concentrated the shareholding is.3 One of the main questions was which financial system “works better” in solving the agency problem; the U.S. system with its developed capital market and dispersed ownership or the more bank-centered systems of Germany or Japan.4 Most recently in 2006 Thomsen et al. find that blockholder ownership and firm value are uncorrelated for the U.S. and UK but negatively associated for Continental Europe. The main idea of this strand of literature is to find an optimum between two opposing effects: The diminishing free-riding problem through more concentrated ownership vs. the stronger incentive to obtain private benefits of control when the magnitude of the block increases. The main empirical result from this research is, as I will show in chapter 5.2.2 in more detail, that the relation between magnitude of shareholding and firm valuation is not distinct. As Holderness (2003) summarizes it in his literature overview: “[] it has not been definitely established whether the impact of blockholders on firm value is positive or negative.” [p. 59]
2. The legal and regulatory environment
In 1998 La Porta, Lopez-de-Silanes, Shleifer and Vishny wrote a seminal work which gave the corporate governance research a whole new direction. They showed in “Law and Finance” that the legal systems provide different levels of protection for minority shareholders against expropriation. Furthermore they discovered that the level of ownership concentration is negatively related to the level of protection. The better the protection, the lower the concentration.
[...]
1 Shleifer / Vishny (1997) [p.737]
2 “[]ownership structure is the mechanism that has been studied most extensively in the rest of the world.“ Denis / McConnell (2003) in their literature overview. [p.11]
3 For example Demsetz / Lehn (1985) or Holderness / Sheehan (1988)
4 Compare Denis / McConnell (2003). [p.11 ff.]
-
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X. -
Upload your own papers! Earn money and win an iPhone X.