In High Gear: A Case Study of the Hees-Edper Corporate Group

Corporate Decision-Making in Canada, R. Daniels & R. Morck (eds.) Industry Canada & the University of Calgary Press, Calgary, 1995

University of Alberta School of Business Research Paper No. 2013-626

Posted: 7 Jun 2013

See all articles by David A. Stangeland

David A. Stangeland

University of Manitoba - Department of Accounting and Finance

Ronald J. Daniels

Independent

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Date Written: May 3, 1994

Abstract

This study compares firms in the Hees-Edper Group with a number of other independent firms of similar size and in the same industries over a four-year period from 1988 to 1992, just prior to the first release of news that the Hees-Edper group was in financial trouble. During that period, HeesEdper firms recorded profitability levels comparable to (or below) those of the matched firms. The Hees-Edper firms were also shown to have been much higher risk investments well before the group's financial position began to deteriorate. They were more highly levered, but even after risk levels are adjusted for this, the risk levels of Hees-Edper firms remain much higher.

Our study shows that the extreme incentive-based compensation schemes used by Hees-Edper firms encouraged managers to adopt high-risk strategies, and that the intercorporate co-insurance (allowed by the interlocking ownership structure of the firms) made this possible by increasing the group's apparent debt capacity. Since this higher risk did not improve overall performance, it was arguably at an economically inefficient higher level. The higher leverage of Hees-Edper companies should have produced a sizable tax advantage because of the deductibility of interest at the corporate level. The mediocre performance of the companies thus raises the possibility that abnormally poor performance was masked by tax breaks.

Suggested Citation

Stangeland, David A. and Daniels, Ronald J. and Morck, Randall K., In High Gear: A Case Study of the Hees-Edper Corporate Group (May 3, 1994). Corporate Decision-Making in Canada, R. Daniels & R. Morck (eds.) Industry Canada & the University of Calgary Press, Calgary, 1995; University of Alberta School of Business Research Paper No. 2013-626. Available at SSRN: https://ssrn.com/abstract=2275622

David A. Stangeland (Contact Author)

University of Manitoba - Department of Accounting and Finance ( email )

Faculty of Management
Winnipeg, MB R3T 5V4
Canada
204-474-6743 (Phone)
204-474-7545 (Fax)

Ronald J. Daniels

Independent ( email )

No Address Available

Randall K. Morck

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governence Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Asian Bureau of Finance and Economic Research ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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