The Principle of Proportional Ownership, Investor Protection and Firm Value in Western Europe

Abstract

Previous research initiated by Claessens et al. (2002) has established a value discount of disproportional ownership structures. Due to omitted variables problems it is difficult to provide a causal interpretation of these findings. We provide a thorough analysis of this value discount in a large sample of Western European firms, which strengthens the causal interpretation that the discount is driven by incentive and entrenchment effects. First, we show that the value discount is higher in firms with low cash flow concentration, in family firms, in industries with higher amenity value and in countries with better investor protection. Second, we show that these findings are consistent with the predictions of a theoretical model of incentive and entrenchment effects. Third, we find little empirical evidence for a number of alternative omitted variable explanations, including: protection of private benefits; voting and block premia; low-liquidity discount; and, protection against uninvited takeovers. Fourth, we present the puzzling finding that the value discount is significantly higher in firms with dual class shares than in firms with pyramidal ownership. Fifth, we find no impact of disproportional ownership structures on operating performance. Finally, we discuss policy implications of these findings in relationship to the ongoing process of harmonization of the European capital markets.

Keywords: Ownership Structure, Dual Class Shares, Pyramids, EU company law

JEL Classification: G30, G32, G34, G38