Ownership Structure and Firm Value: New Evidence from the Spanish Corporate Governance System

Abstract

In this paper we investigate the relationship between ownership structure and value in Spanish firms. We therefore provide new evidence on this relation, since the Spanish corporate governance system differs from the ones considered in previous theoretical and empirical research. According to financial literature on corporate ownership structure, we have focused on the concentration of ownership - in order to test the monitoring and expropriation hypotheses - and on insider ownership - looking for evidence in favour of the convergence-of-interest and entrenchment hypotheses. We have estimated our two empirical models using the same methodology so as to avoid several problems emphasized by previous literature. Specifically, we use the Generalized Method of Moments which allows us to eliminate unobservable heterogeneity - using panel data methodology - and to control for potential endogeneity - using instruments. Unlike previous studies, our empirical evidence supports a quadratic relationship between value and ownership concentration. This result confirms not only the monitoring but also the expropriation effect for the very highest concentration values in Spanish firms. The fact that Spanish majority shareholders manage to expropriate the wealth of minority shareholders, while in other countries - such as the UK, the US, Germany and Japan - this does not occur, confirms the idea that differences in corporate governance systems lead to different value-ownership relations. Additionally, the insider ownership model provides results that support a cubic specification for the value-insider ownership relation in Spanish firms. We interpret this evidence as consistent with both the convergence-of-interests and the entrenchment effects. Moreover, we find that Spanish insiders get entrenched at higher ownership levels than their UK and US counterparts. This result is also consistent with the argument that different value-ownership relations might be explained by differences in corporate governance systems across countries.

Keywords: Corporate governance, insider ownership, ownership concentration, firm value

JEL Classification: G32