Description
Research Reports on Ownership Structure, Financial Decisions, and Institutional Setting: An International Analysis through Simultaneous Equations:- In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder). In UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.
Research Reports on Ownership Structure, Financial
Decisions, and Institutional Setting: An International
Analysis through Simultaneous Equations
We analyze the mutual relations among firms' capital structure, ownership structure, and valuation. Through the estimation of a system of
simultaneous equations for a sample of 1,130 firms from 16 countries from both the common law and the civil law
environments, our results confirm the diferential efect of ownership structure on firms' value in each setting. Whereas in civil law
firms the higher ownership concentration results in an entrenchment and an alignment efect, in the common law firms higher
ownership concentration increases the value of the firm. Second, we corroborate the endogeneity of ownership structure since
we find that ownership structure is afected by the value of the firm and by the capital structure. Third, our results suggest that
corporate finance decisions are taken simultaneously with other mechanisms of corporate governance and conditional on firms'
valuation.
1. Introduction
In latest decades an increasing number of papers have
addressed the interrelation among the ownership structure,
corporate finance decisions, and the value of the firm. Much of
this literature has shown the relevance of both the owner- ship
structure and the capital structure for value creation due to the
separation between corporate ownership and control, the
asymmetric information problems, and the con?icts of interests
among stakeholders [1-4]. Taken together, this research has
highlighted the role of these mechanisms of corporate control
both as a mean of managerial discipline
[5, 6] and as an informative signal to capital markets [7].
Most of the research has addressed the relation between
corporate financial decisions and agency problems in iso- lation
taken into account only one mechanism of corpo- rate control
[8-10]. Notwithstanding, in latest years some
authors have analyzed the simultaneous efect of several of
these factors. These authors have focused on the relation
between corporate value and ownership structure [11-13], with
other authors expanding the models to introduce some
key financial decisions such as the financial leverage, the
dividend policy, or the investment structure [14-16]. Most of this
research has in common that both financial decisions and
ownership structure may modify the managerial incen- tives and
arrives to conclusions to some extent con?icting with the first
group of papers. This divergence of results suggests that
systems of simultaneous equations are one of the most suitable
procedures to identify correctly the interrelation among
corporate ownership, corporate finance, and corporate value [15,
17-19].
An additional advantage of simultaneous equations is the
ability to deal with the possible endogeneity of variables [20, 21].
According to the endogeneity idea, ownership structure is not
only a determinant of corporate finance but also an outcome of
corporate financial decisions and of corporate value, so that
financial decisions should be no longer studied isolated of other
issues of corporate finance but in a joint approach [9, 16].
Running parallel to this process, the in?uence of the legal
and institutional setting is one of the topics in finance which
draws an increasing attention. The origin of the legal
2
system of each country sheds some light on several issues such
as the ownership structure, the corporate governance or the
orientation to capital markets [22-24]. The notable
international diferences across countries suggest the need
of a compared analysis in which the legal origin of each
company is explicitly taken into account.
Our research tries to join at the same time both directions of
research: the one concerning the interrelation of corporate value
and financial decisions, and the one concerning the international
legal approach of finance. We analyze 1,130 firms from 16
countries both from the civil law and the common law systems:
France, Italy, Portugal, Spain, the Netherlands, Belgium,
Greece, Germany, Japan, Austria, Norway, Sweden, Finland,
Australia, USA, and the UK. We wonder three questions: (1) is
corporate ownership structure
endogeneously afected by corporate value? (2) to which
extent are corporate financial decisions and the ownership
structure mutually related and linked to the corporate value? (3)
does all this set of relations depend on the legal and
institutional framework?
Our results suggest, first, a significantly diferent efect
of ownership concentration on the value of the firm.
Whereas in the civil law environment we find a nonlinear
relation combining both the entrenchment and the align- ment
of interests, in common law countries we detect a positive
relation between corporate value and ownership concentration.
For common law firms we find that the entrenchment and
alignment of managerial interests applies,
with a cubical efect of managerial ownership on firm's
value. Second, consistent with the endogeneity approach,
we find that the ownership structure both impacts and is
impacted by corporate value. Third, endogeneity also applies to
capital structure, so that the ownership structure, the capital
structure and the corporate value must be analyzed
simultaneously.
We contribute to the literature by expanding the analysis
framework. Previous research has not yet analyzed these
decisions simultaneously [25], has omitted the efect of
the ownership structure [20], has omitted the efect of
institutional diferences [12, 26], or has neglected the efect
of corporate finance [13]. Thus, our research addresses
the mutual interactions among corporate finance, corporate
ownership, and corporate value taking explicitly into account
the moderating efect of the legal and institutional setting.
The paper is divided into five sections.Section 2 analyzes
previous research. Section 3 describes the empirical analysis: we
explain the sample and variables used, and we explain the
empirical method. Section 4 reports the empirical results and we
assess the robustness of our results. In the final section some
conclusions are drawn from the most outstanding results.
2. Theoretical Background
2.1. Ownership Structure and Corporate Value. A great deal of
the analysis of the relation between ownership structure and
corporate value is founded on the well-known hypotheses of
alignment and entrenchment [3]. The underlying idea in these
hypotheses is the agency con?ict that arises between
shareholders and managers in highly diluted ownership
structures. Although the managerial relation has drawn most of
the attention, in latest years literature has increasingly focused
on the possible con?ict of interests between large dominant
shareholders and minority shareholders [27-31]. In addition, the
type of owner has recently drawn the attention since his/her
ability to monitor can depend on the experience and incentives.
For instance, Estrin et al. [32] find that in China and in some
European Union accessing countries the privatization to foreign
owners has been more
efcient than the privatization to domestic owners.
Theoretically, the ownership concentration increases
managerial monitoring. Nevertheless, a relatively concen- trated
ownership structure could result in ambiguous incen- tives for
large shareholders since they could try to use their power to
extract private benefits. Furthermore, some char- acteristics of
the ownership structure such as crossing shares and pyramidal
structures have exacerbated this problem by increasing these
shareholders' control rights far above their cash ?ow rights [33-
35]. Therefore, a nonlinear relation between corporate value and
large shareholders stakes can arise.
Although the literature has traditionally assumed that firm's
value is an outcome of the ownership structure, recent studies
have proposed that the ownership structure can be the
consequence of a number of corporate decisions too [9, 11, 17].
Thus, the endogeneity issue arises since ownership
structure can be afected by the firm's value [20, 36, 37], and
the unidirectional regression models may no longer be the
most suitable ones to test the efect of ownership structure
[26, 38]. Nevertheless, the sign of this relation is not clear
with some authors claiming a negative relation [39] whereas
other authors support a positive relation [40-42].
Most of this research has been carried out in the so- called
common law countries and just in the latest years the approach
has internationalized [43]. The characteris-tics of the common
law corporate system are a better legal protection of investors, a
more dispersed ownership structure, and the lack of controlling
shareholders [23, 30, 44, 45]. Thus, one could wonder whether
the same kind of relation applies to the civil law environment.
In this framework, investors have worse legal protection and
the
corporate control mechanisms operate diferently. Corporate
ownership is usually more concentrated with some large
shareholders having monitoring capacity (families, insti- tutional
investors, crossing shareholdings, pyramids, etc.). These large
shareholders may be reluctant to share their benefits of control
with minority shareholders and could try to reach an optimal
stake in the ownership.
Consequently, the possible private benefits of control can
lead to a diferent relations among ownership concentration,
managerial ownership, and corporate value in each legal
environment [13, 43, 46]. In fact, Demsetz and Villalonga [11],
Thomsen et al. [13] and Cho [20] show that the value of the firm
can have some in?uence on the ownership structure and
underline the accuracy of simultaneous equations to address this
topic.
Hence, previous literature advises to take into account the
possible endogeneity of the ownership structure, the
3
ambiguity of the causal relation with the value of the firm, Table 1: Sample composition by countries.
and the role of the institutional framework. In the same vein,
the method of simultaneous equations seems to be the most
suitable one to address all this set of relations. Nevertheless, this
analysis would be incomplete if we do not introduce corporate
financial decisions.
2.2. Ownership Structure and Capital Structure. The capital structure
is a mechanism of corporate governance additional to the
ownership structure [47]. Both of them have in common their
informational potential since they can convey expectations about
the investment projects, and they can modify managerial
incentives. From an agency point of view, debt financing
increases the control on managers [48] at the same time that can
work as a signaling mechanism to capital markets [7] too. From
this point of view, the capital structure and the ownership
structure are substitutive mechanisms of corporate governance,
and one should expect a negative relation between them.
Nevertheless, too concentrated ownership can result in
an entrenchment efect and the need of more managerial
monitoring [3]. Since debt financing may act as a managerial
control mechanism, both mechanisms could be viewed as
complementary ones and one could expect a positive relation.
While Myers and Majluf [41] predict a negative relation between
managerial ownership and debt, Kim and Sorensen [49] lend
support to the idea of complementarity
Civil law
French tradition
France
Italy
Portugal
Spain
The Netherlands
Belgium
Greece
German tradition
Germany
Japan
Austria
Scandinavian tradition
Norway
Sweden
Finland
Common law
Australia
USA
UK
Firms
628
344
110
74
17
76
31
13
23
238
94
129
15
46
14
13
19
502
63
256
183
Observations
2,723
1,433
469
284 72
331
138
56
83
1,113
417
613
83
177
51
61
65
2,145
224
1,186
735
detecting a positive relation between ownership structure and
firm financial status.
There is a discussion about the direction of causality, with
some authors supporting the ownership structure as a
consequence of the capital structure [50] and other authors
considering the ownership structure as a determinant of the
capital structure [15, 16]. In any case, such complex
set of possible interrelations makes difcult to isolate one
direction of in?uence and suggests that the final equilibrium
is achieved through the simultaneous interaction of all the
mechanisms [8]. This approach is corroborated by the literature
on the simultaneity between corporate finance and corporate
ownership. In this vein, Chen and Steiner [14] and Fenn and
Liang [51] find that insider ownership is
afected by financing decisions. In terms of alignment and
entrenchment, the ownership structure can have a nonlinear
efect on financial leverage [8, 26].
In sum, given the relevance of corporate financial deci-
sions, the capital structure should be included in a system of
simultaneous equations along with the corporate ownership and
the firm value in order to explore their interrelations and
the most significant diferences between the civil law and the
common law environment.
3. Data, Variables, and Method
Consistently with the abovementioned theoretical back-
ground, we propose a multiple causality direction between the
value of the firm, the ownership structure, and the capital
structure. In addition, the relation can be conditioned by the
institutional setting and, to some extent, by the
profile of agency problems prevailing in each setting. From
a methodological point of view, we do not propose explicit
hypotheses, but we try to find empirical patterns coherent with
the theoretical background, we relate our results to previous
research, and we emphasize the contributions of our research.
3.1. Data. We have collected information on financial
statements (balance sheet and income statement), on equity
market value and on ownership structure from Thomson ONE
Banker. Due to operational constraints given the complexity of
the information about ownership structure, we have not been
able to study all the quoted firms from the sample countries but
have had to take a sample of firms from each country to be
analyzed. The number of firms from each country has been
determined according to the relative economic importance of the
country. As shown in Table 1, our sample includes 4,868
observations from 1,130 firms from 16 nations from Europe,
Asia, Australia, and America between 2000 and 2006. Evidently,
there are
diferences among the number of firms from each country
given the diferent size of the country and the importance of
capital markets. The classification of the institutional setting
is based on the Law & Finance approach, so that firms belong
either to the civil law or to the common law system. Civil law
firms account for 55.5 percent of firms and for 55.9 percent of
observations, whereas common law firms account for 44.5
percent of firms and 44.1 percent of observations.
3.2. Variables. The dependent variables can be classified into
three corporate issues: firm value, ownership structure, and
capital structure. Market value has been defined as the ratio
4
of equity market value to book value (MBE). This variable has
been widely used in previous research and enhances the
comparability of our results [52-56].
Ownership structure has been operationalized on the basis
of the ownership concentration, the identity of the largest
shareholders, and the managerial ownership. We define the
ownership concentration with two variables: the proportion of
shares held by the largest shareholder (C1) and a Herfindahl
index of concentration in the hands of the five largest
shareholders (HERF). We use two variables because, although
HERF variable is a more comprehensive metric
of ownership concentration [57-59], it sufers from severe
limitations for nonlinear specifications of the ownership
structure. Concerning the identity of the largest shareholder, the
information provided by Thomson ONE Banker allows
The firm's value depends on the financial leverage, and on
the ownership structure (measured both by the ownership
concentration and the managerial ownership).
Due to nonlinear efects, we include both variables in linear
and squared terms. We also control for the usual factors.
The second equation is aimed to explain the ownership
concentration (HERF). Given the possibility of endogeneous
relations, this variable depends on the value of the firm, on the
financial leverage and on the control variables. In the third
equation, capital structure depends on the other two
endogeneous variables (the value of the firm and the ownership
concentration) and on the control variables.
Thus, the system of three simultaneous equations can be
stated as follows:
us to scrutinize carefully the nature of the shareholders.
MBE
it
=o
1
+|
1
- LEV +|
2
- C1
it
+|
3
- C1
2
it
Accordingly, we divide the largest shareholders into two groups:
strategic entities and investment managers. Strategic entities are
nonfinancial corporations, individual investors, and families that
hold a stake in a firm for the sake of strategic interests and
controlling purposes. Investment managers are banks, trusts,
mutual and pension funds, insurance companies, and venture
capital whose main orientation is not strategic but rather focused
on financial performance. Managerial ownership has been
defined as INS, the propor- tion of shares owned by inside
shareholders [3]. We have defined LEV to measure financial
leverage as the ratio of the book value of debt to the book value
of equity [14].
We also control for the factors potentially afecting
corporate financial decisions, the ownership structure or
the firm market value [60]. First, we control for the firm size
(SIZE), defined as the log of total assets. Second, we
+|
4
- INS
it
+|
5
- INS
2
+|
6
- SIZE
it
it
+|
7
- RISK
it
+|
8
- ROA
it
+|
9
- OPORT
it
+q
t
+c
it
,
HERF
it
=o
1
+|
1
- LEV +|
2
- MBE
it
+|
3
- SIZE
it
+|
4
- RISK
it
+|
5
- ROA
it
+|
6
- OPORT
it
+q
t
+c
it
,
LEV
it
=o
1
+|
1
- MBE +|
2
- HERF
it
+|
3
- SIZE
it
+|
4
- RISK
it
+|
5
- ROA
it
+|
6
- OPORT
it
+q
t
+c
it
,
(1)
(2)
(3)
control for the performance of the firm through ROA or the
return on assets. Third, we control for growth opportunities
(OPORT) with the intangible assets to total long-term assets
ratio [61, 62]. Fourth, we control for the risk of the firm with
the variance of the ROA from the beginning of the analyzed
period [63, 64]. To control for time, country,
and industry efects, we define a set of year-dummy and
country-dummy variables as well as a set of one-digit SIC
classification industry-dummy variables. In addition, since
there can be some diferences across the analysed countries in
terms of their development, we also control for such efects
through a dummy variable (RICH). This variable is defined
according to the information on GDP per capita provided by the
International Monetary Fund [65]. Consistent with this dataset
the countries above the median value are Australia, Austria,
Belgium, Finland, the Netherlands, Japan, Norway, Sweden, and
the USA.
3.3. Method. Given our aim to analyze the possible simul- taneity
of financial decisions and due to the possible endogeneity of the
ownership structure, we estimate a system of three simultaneous
equations in which each equation is related to one of the issues.
Thus, the dependent variable in the first equation is the value of
the firm, in the second equation the ownership concentration,
and in the third equation the capital structure.
whereq
t
are the dummy variables for time efects and
c
it
is the random error. Time-dummy variables are aimed
to control for macroeconomic factors that could impact
on all the firms in a given moment. Given the significant
diferences between both institutional settings, we run the
system of simultaneous equations separately for civil law and
for common law firms.
The random errors are likely to be correlated across equa-
tions. Accordingly, we should not estimate each equation in
isolation but run a joint test of the three equations. One of the
most widely used estimation methods is the three- stages least-
squares method (3SLS). This procedure provides
efcient estimates when error terms can be correlated across
equations. In the first stage, instrumental variables are
developed for all the endogeneous variables by combining the
other endogeneous variables and the predetermined variables.
In the second stage the estimates are computed based on the
residuals of the two steps estimates for each equation. Finally,
in the third step, a generalized least- squares estimation is done
using the covariance matrix of the second step and using the
instrumental variables instead of the endogeneous variables. We
consider as endogeneous the three, dependent variables: the
firm's value, the capital structure and the ownership
concentration. To avoid outliers that could bias our results, we
run the outlier detection multivariate procedure [66, 67]. This
method provides a suitable dropout of outliers through a
multivariate approach.
5
Table 2: Descriptive statistics. Table 3: Results of the test of means comparison.
Variable Mean Std. dev. Min. Max. Variable Civil law Common law P-value
MBE 2.667 2.251 0.103 30.111 MBE 2.247 3.200 0.000
LEV 2.163 1.690 0.055 12.059 LEV 2.284 2.009 0.000
C1 19.722 21.262 0 99.980 HERF 0.434 0.336 0.000 INS 12.119
9.893 0 79.960 C1 26.524 11.087 0.000 HERF 0.418
0.168 0.2 0.990 INS 13.736 9.904 0.000 SIZE 3.652
0.635 1.274 5.747 SIZE 3.554 3.776 0.000
ROA 0.089 0.060 ÷0.213 0.430 ROA 0.078 0.103 0.000
RISK 0.447 1.057 0 10.611 RISK 0.002 1.012 0.000
OPORT 0.238 0.913 0 0.925 OPORT 0.124 0.344 0.000
Given some concerns about the possible misspecifica- tion
of one equation leading to biased estimates of the other
equations, we provide the Hausman-Wu test [68]. This test
allows checking the validity of the equation-by- equation
estimates against 3SLS under the null hypothesis that any
endogeneity among the regressors would not have
deleterious efects on the estimates. The Hausman-Wu test is
distributed chi-squared with m degrees of freedom, where m
is the number of regressors specified as endogenous in the
original instrumental variables regression. As a robustness
check of the efect of the institutional setting, Tables 4 and
5 report the average treatment efect by comparing outcomes
from both institutional environments [69].
4. Results
4.1. Descriptive Analysis. Table 2 reports the mean, the
standard error, the maximum, and the minimum of the main
variables. In order to underline the diference across legal
environments, Table 3 reports the mean value in each setting
and the P-value for the test of means comparison between both
subsamples.
As shown in Table 3, there are significant diferences
between the civil-law and the common-law firms. Civil-law
firms have higher financial leverage, lower market valuation [70],
more concentrated ownership [23], and higher man-
agerial ownership. There are also significant diferences in the
control variables, with smaller firms and lower performance
in the civil law setting. These firms also run less risk (which
could be related to their lower performance) and have less
growth opportunities.
These results are coherent with previous literature [27,
28] and point at the possibility of diferential efects in each
institutional setting and, thus, the need of a diferential
analysis for civil law and for common law firms.
4.2. Explanatory Analysis. In order to avoid an excessively
complex presentation of the results due to the multiple
interactions among variables, we will focus our analysis
on the answer to the three basic questions: (1) diferential
in?uence of the ownership structure conditional on legal
frameworks; (2) endogeneity of the ownership structure; (3)
interdependence among the mechanisms of corporate
governance.
In Table 4, we report the estimates of the baseline model.
The three upper rows are the estimates of the endogeneous
variables, and below them we report the estimates of the control
variables. As shown in Column (1), there is an oppo- site
in?uence of ownership concentration on the value of the firm
(MBE) in each legal and institutional setting. HERF variable
cannot be included in the system of simultaneous equations due
to the specification problems because the joint inclusion of
HERF, C1, and INS would render impossible the estimation of
the model. Whereas in the civil law setting the ownership
concentration is nonlinearly related to the value of the firm, in
the common law countries there is no relation between the
ownership concentration and the value of the firm. The results in
the civil-law firms can be explained on
the basis of the entrenchment and the convergence efects.
For low levels of ownership, the largest shareholders can try
to extract private benefits, which would have a negative efect
on the value of the firm. Nevertheless, for high enought
owership concentration (the turning point is around 56 percent
of the ownership of the largest shareholder) there is a closer
identification between the interests of the largest shareholder
and the interests of the other shareholders, which should
improve the value of the firm.
This result is consistent with recent literature that shows a
positive in?uence of the ownership concentration on the
performance of the firms in this kind of countries [71- 73].
These authors stress that the ownership concentration, by giving
incentives to the largest shareholders to monitor managers,
reduces the agency con?ict between managers and shareholders.
On the contrary, the lack of relation between the firm's value
and C1 is consistent with the managerial relation rather than the
concentrated ownership being the main agency problem in the
Anglo-Saxon institutional setting [27, 30].
Column (1) in Table 4 also shows an asymmetric efect of
the managerial ownership: while in civil-law firms there is a
nonlinear relation with the value of the firm, in the common- law
environment the managerial ownership does not have any
significant impact on the firm's value. This result can be
explained by institutional issues since managers in the civil-law
firms are more identified with shareholders, so that managerial
ownership works as a mechanism of corporate control
complementary to the ownership concentration.
6
Thus, to some extent, in the civil-law firms the managerial
ownership replies the efect of the ownership concentration.
Results reported in Column (2) of Table 4 also corrob-
orate the endogeneity of the ownership structure since the
ownership concentration is afected by the value of the firm.
Thus, there is a mutual interaction between firm's value
and the ownership structure. Moreover, the value of the
firm has a diferential efect on the ownership concentration
conditional on the institutional setting: while in civil-law
countries the firms with higher market value have more
concentrated ownership, in common law firms we detect the
opposite relation. In addition, ownership structure depends not
only on the value of the firm but also on the financial leverage,
growth opportunities, risk, and firm performance. Interestingly,
the sign of the impact of financial leverage is
diferent in each institutional setting.
As far as financial decisions are concerned, Column
(3) in Table 4 shows that capital structure and ownership
structure are taken simultaneously. Once more, the efect
of the ownership structure is diferent in each institutional
environment: in civil-law firms both mechanisms are com-
plementary, with positive interaction between them; on the
contrary, the capital structure and the ownership structure are
alternative mechanisms of control in common law firms. The
value of the firm is also related to financial leverage with a negative
direction of causality. This result can be explained by the
pecking-order theory [41], since firms with more
ability to generate internal funds are less leveraged.
All the estimates include time, country, and industry control
dummies. We also report the Hausman-Wu test
of specification and the average treatment efect on the
treated. According to the Hausman test, the possibility of
misspecification of the model can be ruled out. The average
treatment efect on the treated is always significant and
lends support to the rejection of the null hypothesis of no
diferences between both sub-samples. We also report the R-
squared coefcient for each equation.
Therefore, our results point at a diferential efect of the
ownership structure on the value of the firm depending on
the legal environment, at the endogeneity of the ownership
structure, and at the relation between capital structure and other
mechanisms of corporate governance. In order to have a more
in-depth view of the relation between ownership concentration
and firm's value we perform an additional analysis splitting up
the sample conditional on the nature of the largest shareholder:
investment manager versus strategic entity.
The results of this analysis are reported in Table 5 and
provide interesting insights. As one can see in Col- umn (1) in
Table 5 the ownership concentration has a
nonlinear efect on the value of the firms whose largest
shareholder is a strategic entity. Since strategic entities
usually hold a stable stake in the ownership of the firm, this
result confirms the duality of alignment versus entrenchment
problems related to strategic entities as large shareholders. On
the contrary, the ownership concentra- tion in the hand of
investment managers has a linear negative impact on the value
of the firms. This result can be explained by the short-term
orientation of such
shareholders, so that too big stakes could destabilize the strategy
of the firm [18, 74]. All the other relations are
basically unafected, which corroborates the fact that the
ownership structure is endogeneously determined with the
value of the firm and that financial decisions are taken
simultaneously with other mechanisms of corporate con- trol.
According to the Hausman-Wu test, the model is not
badly specified. The average treatment efect on the treated
allows rejecting with a high confidence level the hypothesis
that both sub-samples are the same and, therefore, we can accept
that the each kind of largest shareholder has specific
features. We also report the R-squared coefcient for each
equation.
The results reported previously raise two questions: the
efect of the country development, and the possibility of
managerial ownership replicating the efect of ownership
concentration. Thus, the estimates in Table 6 shows two
specific issues: first, we introduce C1DEV and C1DEV
2
, two
interacted variables computed as the product of RICH and both
C1 and C1
2
. These variables illustrate the specific
efect of ownership concentration in the more developed or
richer countries. Second, we introduce a cubical efect of the
managerial ownership [38].
These new estimates stress the need to control for
international issues such as the economic development and the
institutional environment. Column (1) in Table 6 shows
the asymmetric efect of the largest shareholder stake: a
nonlinear relation for civil law firms, and the lack of
relation for common law firms. More interestingly, C1DEV
and C1DEV
2
play a moderating efect (with the opposite
in?uence of C1 and C1
2
). These results mean that, in the
more developed countries, ownership concentration has a U-
inverted in?uence that can counterbalance the in?uence of C1
and C1
2
. This is in line with some recent research
about the diferential efects of ownership for less developed
European countries [32].
Also according to Column (1) in Table 6, the managerial
ownership has a significantly diferent efect in each legal
setting. Whereas in common-law firms managerial owner-
ship does not have any relevant efect on the value of the
firm, in civil-law firms there is a cubical relation with three
diferent phases. There is an initial positive in?uence of
managerial ownership on the value of the firm, according to
the hypothesis of convergence of interests. Then, the relation
turns into a negative one and, after a certain threshold, the
relation becomes positive again. These results make sense since,
for high enough managerial ownership, there is an identification
between shareholders and managers, with a positive in?uence on
the value of the firm.
Once again, the other two key ideas of our research hold
too. As shown in column (2), the value of the firm and the
capital structure are significant determinants of the ownership
structure, so that the ownership structure becomes an
endogenous issue. Column (3) reports that both the ownership
concentration and the value of the firm have significant in?uence
on the capital structure. The checks for the specification of the
model support the validity of the estimates too.
7
Table 4: System of simultaneous equations estimates: baseline model.
Civil Common Civil Common Civil Common
(1) MBE (2) HERF (3) LEV
LEV 1.707
---
1.302
---
---0.215 0970
---
(0.333) (0.332) (0.043) (0.035)
MBE 0.118
---
÷0.744
---
÷0.549
--
0.766
---
(0.044) (0.168) (0.284) (0.173)
HERF 4.091
---
1.030
---
(0.213) (0.048)
SIZE ÷1.151
---
÷0,384
--
÷0.170
---
÷0.284
---
0.756
---
0.292
---
(0.217) (0.163) (0.032) (0.105) (0.092) (0.108)
OPORT ÷0.013 ÷0.007 ÷0.004
---
÷0.005 ÷0.019
--
÷0.005
(0.009) (0.004) (0.001) (0.004) (0.008) (0.004)
--- -- ÷3.874 -- -- -RISK 31.893 0.013 0.010 16.656 0.010
--
(5.231) (0.006) (1.647) (0.005) (8.262) (0.005)
ROA 26.884
---
24.371
---
0.849
---
18.134
---
÷3.790
---
÷18.689
---
(3.295) (1.530) (0.786) (3.424) (3.315) (3.517)
C1
÷0.034
---
÷0.008 -
(0.011) (0.004)
C1
2
0.000
--
0.000
(0.000) (0.000)
INS ÷0.047
---
÷0.000
(0.011) (0.001)
INS
2
0.000
---
÷0.000
(0.000) (0.000)
Country efect Yes Yes Yes Yes Yes Yes
Industry efect Yes Yes Yes Yes Yes Yes
Year efect Yes Yes Yes Yes Yes Yes
Observations 1176 1608 1176 1608 1176 1608
Average treatment efect ÷0.1504
---
(0.0062) 1.2545
---
(0.2082) ÷1.4443
--
(0.7152)
Hausman-Wu test 82.41
---
66.35
---
11.36
---
12.73
---
27.84
---
65.97
---
R2 0.4704 0.3410 0.1988 0.3756 0.2964 0.2760
Estimated coefcients and (standard deviation) of the systems of simultaneous equations. The endogeneous variables are financial leverage (LEV), MBE (ratio
of equity market to book value), and HERF (Herfindahl index of ownership concentration). The exogeneous variables are return on assets (ROA), the size
of the firm (SIZE), the growth opportunities (OPORT), the risk of the assets (RISK), the percentage of shares held by the largest shareholder (C1) and the percentage of
shares held by the managers (INS).
---
,
--
,
-
stand for significant at 99%, 95%, and 90% confidence levels. The Chow test allow testing the null hypothesis that both estimations are from the same
sample. All the estimations include time-dummy variables.
5. Concluding Remarks
Recent research in corporate finance based on the agency the- ory
and on the economics of information has tried to explain the
interrelations among corporate ownership structure, cor- porate
capital structure, and corporate value. The relevance of the
ownership structure (ownership concentration, man- agerial
ownership, and the nature of the largest shareholders) and of the
capital structure is due to be two prominent mech- anisms of
corporate governance that can curb the con?icts of interests
inside the firm. Our research assumes that both
mechanisms are designed simultaneously in order to achieve the
optimal corporate governance. Thus, we follow a growing field of
the literature that states that the capital structure and the
ownership structure are endogenously determined inside the
firm, so that there may be mutual inter-causality.
Our paper is also founded on the Law & Finance
approach, according to which the legal and institutional
environment has a significant impact on the corporate control.
Whereas in the so-called common-law countries the most
important con?ict is the one between managers and
shareholders, in the civil-law countries the most significant
8
Table 5: System of simultaneous equations estimates: type of large shareholders (investment managers versus strategic entities).
IM SE IM SE IM SE
(1) MBE (2) HERF (3) LEV
LEV 1.111
---
1.629
---
0.174
---
0.243
---
(0.343) (0.360) (0.043) (0.084)
MBE ÷0.154
---
÷0.146
---
÷2.292 0.215
(0.041) (0.046) (2.428) (0.264)
HERF 3.891 2.165
---
(5.710) (0.215)
SIZE ÷0.656
---
÷1.403
---
÷0.103
---
÷0.210
---
0.001 0.739
---
(0.194) (0.247) (0.026) (0.056) (0.681) (0.079)
OPORT ÷0.061 0.146
---
÷0.000 ÷0.005
---
÷0.058 0.007
(0.020) (0.032) (0.000) (0.001) (0.046) (0.009)
RISK 0.079 ÷0.318
---
0.012 0.003
--
0.407 ÷0.009
-
(0.088) (0.082) (0.013) (0.001) (0.420) (0.005)
--- --- -- ---ROA 23.827 26.898 3.685 3.975 41.075 ÷11.398
---
(1.624) (3.445) (0.945) (1.256) (47.507) (3.452)
C1 ÷0.034 ÷0.023
--
(0.026) (0.011)
C1
2
÷0.000 ÷2E÷04
-
(0.000) (1E÷04)
INS 0.000 0.000
(0.003) (0.011)
INS
2
÷0.000 0.000
(0.000) (0.000)
Country efect Yes Yes Yes Yes Yes Yes
Industry efect Yes Yes Yes Yes Yes Yes
Year efect Yes Yes Yes Yes Yes Yes
Observations 1575 1206 1575 1206 1575 1206
Average treatment efect ÷0.2442
---
(0.0054) 0.4042
--
(0.2285) ÷0.6499
---
(0.0355)
Hausman-Wu test 75.55
---
21.33
---
21.98
--
32.74
---
10.29
---
31.72
---
R
2
0.4072 0.3443 0.2698 0.2793 0.2757 0.3077
Estimated coefcients and (standard deviation) of the systems of simultaneous equations. Regressions are run according to the nature of the largest
shareholder: investment manager (IM) or strategic entity (IE). The endogeneous variables are financial leverage (LEV), MBE (ratio of equity market to book
value) and HERF (Herfindahl index of ownership concentration). The exogeneous variables are return on assets (ROA), the size of the firm (SIZE), the growth opportunities
(OPORT), the risk of the assets (RISK), and the percentage of shares held by the largest shareholder (C1) and the percentage of shares held by the managers (INS).
---
,
--
,
-
stand for significant at 99%, 95%, and 90% confidence levels. The Chow test allow testing the null hypothesis that both estimations are from the same simple. All the estimations include time-dummy
variables.
agency problem arises due to the possible expropriation of
minority shareholders by large dominant shareholders.
We analyze the mutual relations between ownership
structure, capital structure, and the value of the firm for a sample
of 1,130 firms from France, Italy, Portugal, Spain, the
Netherlands, Belgium, Greece, Germany, Japan, Austria,
Norway, Sweden, Finland, Australia, USA, and UK between
2000 and 2006. We use the simultaneous equations method.
Our results suggest significant diferences conditional on the
legal and institutional setting. In the civil-law countries there
is a U-shaped relation between ownership concentration
and the value of the firm: a negative relation for low levels of
concentration, and a positive relation for high enough
concentration. On the contrary, in the common-
law countries there is a positive efect of the ownership
concentration on the value of the firm.
This asymmetric in?uence can be explained on the basis of
the entrenchment and convergence of the largest share- holders'
interests in the civil law firms. In this environment, the ownership
is more concentrated so the main con?ict is the one between
dominant shareholders and minority shareholders. In the civil-
law setting, we also find that the
9
Table 6: Systems of simultaneous equations estimates: cubical efect of managerial ownership.
Civil Common Civil Common Civil Common
(1) MBE (2) HERF (3) LEV
LEV 1.886
---
0.658
-
0.224
---
÷0.211
---
(0.365) (0.348) (0.036) (0.019)
MBE 0.100
---
÷0.289
---
÷0.419
--
1.370
---
(0.036) (0.048) (0.194) (0.266)
HERF 3.680
---
4.669
---
(0.170) (0.313)
SIZE ÷1.268
---
÷0.287
-
÷0.177
---
÷0.085
---
0.742
---
0.402
---
(0.240) (0.167) (0.028) (0.031) (0.080) (0.150)
OPORT ÷0.015 ÷0.011
--
÷0.004
---
÷0.003
---
0.017
--
0.014
--
(0.009) (0.004) (0.001) (0.001) (0.007) (0.006)
RISK 32.672
---
0.014
--
÷3.351 --
0.004
---
12.469
--
÷0.021
---
(5.463) (0.006) (1.432) (0.001) (6.447) (0.007)
ROA 28.524
---
21.658
---
1.138
-
6.362
---
÷5.141
--
÷30.083
---
(3.600) (1.620) (0.646) (1.005) (2.329) (5.360)
÷0.047 ---C1 ÷0.022 --
(0.014) (0.010)
C1
2
0.000
---
÷0.000
(0.000) (0.000)
--
C1DEV 0.042 0.0046
(0.019) (0.013)
C1
2
DEV ÷0.001
---
0.001
(0.000) (0.001)
INS ÷0.083
---
0.001
(0.019) (0.018)
INS
2
0.001
---
÷0.000
(0.000) (0.000)
INS
3
÷0.000
---
0.000
(0.000) (0.000)
Country efect Yes Yes Yes Yes Yes Yes
Industry efect Yes Yes Yes Yes Yes Yes
Year efect Yes Yes Yes Yes Yes Yes
Observations 1176 1608 1176 1608 1176 1608
Average treatment efect ÷0.2394
--
(0.1381) 0.2739
--
(0.0820) ÷0.5550
---
(0.1352)
Hausman-Wu test 23.74
---
29.91
---
53.82
---
68.26
---
36.68
---
27.93
---
R2 0.3589 0.4716 0.2345 0.2105 0.2962 0.2758
Estimated coefcients and (standard deviation) of the systems of simultaneous equations. The endogeneous variables are financial leverage (LEV), MBE (ratio
of equity market to book value), and HERF (Herfindahl index of ownership concentration). The exogeneous variables are return on assets (ROA), the size
of the firm (SIZE), the growth opportunities (OPORT), the risk of the assets (RISK), the percentage of shares held by the largest shareholder (C1), and the percentage of
shares held by the managers (INS).
---
,
--
,
-
stand for significant at 99%, 95%, and 90% confidence levels. The Chow test allow testing the null hypothesis that both estimations are from the same
simple. All the estimations include time-dummy variables.
degree of development of the country plays a relevant role, since
the ownership concentration has an opposite impact in the most
and in the least developed countries.
The nature of the largest shareholder also provides inter-
esting insights. Our data show that the entrenchment efect
is specially prevailing when the largest shareholder holds a stable
stake as most of the strategic entities (i.e., nonfinancial
corporations, individual investors, and families) do.
The efect of managerial ownership is also afected by
the institutional environment, with a significant in?uence
10
in the civil-law countries and no in?uence in the common- law
countries. This result can be explained since in the civil- law
setting the managerial ownership and the ownership
concentration work as complementary mechanisms of cor-
porate control. A more in-depth analysis shows that this relation
is better specified in the civil law countries through a cubic
relation. In this way, there is a convergence of interest between
shareholders and managers both for low levels and for very high
levels of managerial ownership.
Our results also support the double causal relation between
the ownership structure and firm's value. This result corroborates
the idea of endogeneity by showing that the ownership structure
is not only a significant determinant of the value of the firm, but
also it is an outcome of the value of the firm.
Finally, we detect an interrelation between financial leverage
and ownership structure conditional on the legal environment.
Whereas both mechanisms work as comple- mentary
mechanisms in the civil law system, they seem to be substituting
mechanisms in the common law firms.
Acknowledgments
This paper has benefited from the comments of two anony-
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doc_703537506.docx
Research Reports on Ownership Structure, Financial Decisions, and Institutional Setting: An International Analysis through Simultaneous Equations:- In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder). In UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.
Research Reports on Ownership Structure, Financial
Decisions, and Institutional Setting: An International
Analysis through Simultaneous Equations
We analyze the mutual relations among firms' capital structure, ownership structure, and valuation. Through the estimation of a system of
simultaneous equations for a sample of 1,130 firms from 16 countries from both the common law and the civil law
environments, our results confirm the diferential efect of ownership structure on firms' value in each setting. Whereas in civil law
firms the higher ownership concentration results in an entrenchment and an alignment efect, in the common law firms higher
ownership concentration increases the value of the firm. Second, we corroborate the endogeneity of ownership structure since
we find that ownership structure is afected by the value of the firm and by the capital structure. Third, our results suggest that
corporate finance decisions are taken simultaneously with other mechanisms of corporate governance and conditional on firms'
valuation.
1. Introduction
In latest decades an increasing number of papers have
addressed the interrelation among the ownership structure,
corporate finance decisions, and the value of the firm. Much of
this literature has shown the relevance of both the owner- ship
structure and the capital structure for value creation due to the
separation between corporate ownership and control, the
asymmetric information problems, and the con?icts of interests
among stakeholders [1-4]. Taken together, this research has
highlighted the role of these mechanisms of corporate control
both as a mean of managerial discipline
[5, 6] and as an informative signal to capital markets [7].
Most of the research has addressed the relation between
corporate financial decisions and agency problems in iso- lation
taken into account only one mechanism of corpo- rate control
[8-10]. Notwithstanding, in latest years some
authors have analyzed the simultaneous efect of several of
these factors. These authors have focused on the relation
between corporate value and ownership structure [11-13], with
other authors expanding the models to introduce some
key financial decisions such as the financial leverage, the
dividend policy, or the investment structure [14-16]. Most of this
research has in common that both financial decisions and
ownership structure may modify the managerial incen- tives and
arrives to conclusions to some extent con?icting with the first
group of papers. This divergence of results suggests that
systems of simultaneous equations are one of the most suitable
procedures to identify correctly the interrelation among
corporate ownership, corporate finance, and corporate value [15,
17-19].
An additional advantage of simultaneous equations is the
ability to deal with the possible endogeneity of variables [20, 21].
According to the endogeneity idea, ownership structure is not
only a determinant of corporate finance but also an outcome of
corporate financial decisions and of corporate value, so that
financial decisions should be no longer studied isolated of other
issues of corporate finance but in a joint approach [9, 16].
Running parallel to this process, the in?uence of the legal
and institutional setting is one of the topics in finance which
draws an increasing attention. The origin of the legal
2
system of each country sheds some light on several issues such
as the ownership structure, the corporate governance or the
orientation to capital markets [22-24]. The notable
international diferences across countries suggest the need
of a compared analysis in which the legal origin of each
company is explicitly taken into account.
Our research tries to join at the same time both directions of
research: the one concerning the interrelation of corporate value
and financial decisions, and the one concerning the international
legal approach of finance. We analyze 1,130 firms from 16
countries both from the civil law and the common law systems:
France, Italy, Portugal, Spain, the Netherlands, Belgium,
Greece, Germany, Japan, Austria, Norway, Sweden, Finland,
Australia, USA, and the UK. We wonder three questions: (1) is
corporate ownership structure
endogeneously afected by corporate value? (2) to which
extent are corporate financial decisions and the ownership
structure mutually related and linked to the corporate value? (3)
does all this set of relations depend on the legal and
institutional framework?
Our results suggest, first, a significantly diferent efect
of ownership concentration on the value of the firm.
Whereas in the civil law environment we find a nonlinear
relation combining both the entrenchment and the align- ment
of interests, in common law countries we detect a positive
relation between corporate value and ownership concentration.
For common law firms we find that the entrenchment and
alignment of managerial interests applies,
with a cubical efect of managerial ownership on firm's
value. Second, consistent with the endogeneity approach,
we find that the ownership structure both impacts and is
impacted by corporate value. Third, endogeneity also applies to
capital structure, so that the ownership structure, the capital
structure and the corporate value must be analyzed
simultaneously.
We contribute to the literature by expanding the analysis
framework. Previous research has not yet analyzed these
decisions simultaneously [25], has omitted the efect of
the ownership structure [20], has omitted the efect of
institutional diferences [12, 26], or has neglected the efect
of corporate finance [13]. Thus, our research addresses
the mutual interactions among corporate finance, corporate
ownership, and corporate value taking explicitly into account
the moderating efect of the legal and institutional setting.
The paper is divided into five sections.Section 2 analyzes
previous research. Section 3 describes the empirical analysis: we
explain the sample and variables used, and we explain the
empirical method. Section 4 reports the empirical results and we
assess the robustness of our results. In the final section some
conclusions are drawn from the most outstanding results.
2. Theoretical Background
2.1. Ownership Structure and Corporate Value. A great deal of
the analysis of the relation between ownership structure and
corporate value is founded on the well-known hypotheses of
alignment and entrenchment [3]. The underlying idea in these
hypotheses is the agency con?ict that arises between
shareholders and managers in highly diluted ownership
structures. Although the managerial relation has drawn most of
the attention, in latest years literature has increasingly focused
on the possible con?ict of interests between large dominant
shareholders and minority shareholders [27-31]. In addition, the
type of owner has recently drawn the attention since his/her
ability to monitor can depend on the experience and incentives.
For instance, Estrin et al. [32] find that in China and in some
European Union accessing countries the privatization to foreign
owners has been more
efcient than the privatization to domestic owners.
Theoretically, the ownership concentration increases
managerial monitoring. Nevertheless, a relatively concen- trated
ownership structure could result in ambiguous incen- tives for
large shareholders since they could try to use their power to
extract private benefits. Furthermore, some char- acteristics of
the ownership structure such as crossing shares and pyramidal
structures have exacerbated this problem by increasing these
shareholders' control rights far above their cash ?ow rights [33-
35]. Therefore, a nonlinear relation between corporate value and
large shareholders stakes can arise.
Although the literature has traditionally assumed that firm's
value is an outcome of the ownership structure, recent studies
have proposed that the ownership structure can be the
consequence of a number of corporate decisions too [9, 11, 17].
Thus, the endogeneity issue arises since ownership
structure can be afected by the firm's value [20, 36, 37], and
the unidirectional regression models may no longer be the
most suitable ones to test the efect of ownership structure
[26, 38]. Nevertheless, the sign of this relation is not clear
with some authors claiming a negative relation [39] whereas
other authors support a positive relation [40-42].
Most of this research has been carried out in the so- called
common law countries and just in the latest years the approach
has internationalized [43]. The characteris-tics of the common
law corporate system are a better legal protection of investors, a
more dispersed ownership structure, and the lack of controlling
shareholders [23, 30, 44, 45]. Thus, one could wonder whether
the same kind of relation applies to the civil law environment.
In this framework, investors have worse legal protection and
the
corporate control mechanisms operate diferently. Corporate
ownership is usually more concentrated with some large
shareholders having monitoring capacity (families, insti- tutional
investors, crossing shareholdings, pyramids, etc.). These large
shareholders may be reluctant to share their benefits of control
with minority shareholders and could try to reach an optimal
stake in the ownership.
Consequently, the possible private benefits of control can
lead to a diferent relations among ownership concentration,
managerial ownership, and corporate value in each legal
environment [13, 43, 46]. In fact, Demsetz and Villalonga [11],
Thomsen et al. [13] and Cho [20] show that the value of the firm
can have some in?uence on the ownership structure and
underline the accuracy of simultaneous equations to address this
topic.
Hence, previous literature advises to take into account the
possible endogeneity of the ownership structure, the
3
ambiguity of the causal relation with the value of the firm, Table 1: Sample composition by countries.
and the role of the institutional framework. In the same vein,
the method of simultaneous equations seems to be the most
suitable one to address all this set of relations. Nevertheless, this
analysis would be incomplete if we do not introduce corporate
financial decisions.
2.2. Ownership Structure and Capital Structure. The capital structure
is a mechanism of corporate governance additional to the
ownership structure [47]. Both of them have in common their
informational potential since they can convey expectations about
the investment projects, and they can modify managerial
incentives. From an agency point of view, debt financing
increases the control on managers [48] at the same time that can
work as a signaling mechanism to capital markets [7] too. From
this point of view, the capital structure and the ownership
structure are substitutive mechanisms of corporate governance,
and one should expect a negative relation between them.
Nevertheless, too concentrated ownership can result in
an entrenchment efect and the need of more managerial
monitoring [3]. Since debt financing may act as a managerial
control mechanism, both mechanisms could be viewed as
complementary ones and one could expect a positive relation.
While Myers and Majluf [41] predict a negative relation between
managerial ownership and debt, Kim and Sorensen [49] lend
support to the idea of complementarity
Civil law
French tradition
France
Italy
Portugal
Spain
The Netherlands
Belgium
Greece
German tradition
Germany
Japan
Austria
Scandinavian tradition
Norway
Sweden
Finland
Common law
Australia
USA
UK
Firms
628
344
110
74
17
76
31
13
23
238
94
129
15
46
14
13
19
502
63
256
183
Observations
2,723
1,433
469
284 72
331
138
56
83
1,113
417
613
83
177
51
61
65
2,145
224
1,186
735
detecting a positive relation between ownership structure and
firm financial status.
There is a discussion about the direction of causality, with
some authors supporting the ownership structure as a
consequence of the capital structure [50] and other authors
considering the ownership structure as a determinant of the
capital structure [15, 16]. In any case, such complex
set of possible interrelations makes difcult to isolate one
direction of in?uence and suggests that the final equilibrium
is achieved through the simultaneous interaction of all the
mechanisms [8]. This approach is corroborated by the literature
on the simultaneity between corporate finance and corporate
ownership. In this vein, Chen and Steiner [14] and Fenn and
Liang [51] find that insider ownership is
afected by financing decisions. In terms of alignment and
entrenchment, the ownership structure can have a nonlinear
efect on financial leverage [8, 26].
In sum, given the relevance of corporate financial deci-
sions, the capital structure should be included in a system of
simultaneous equations along with the corporate ownership and
the firm value in order to explore their interrelations and
the most significant diferences between the civil law and the
common law environment.
3. Data, Variables, and Method
Consistently with the abovementioned theoretical back-
ground, we propose a multiple causality direction between the
value of the firm, the ownership structure, and the capital
structure. In addition, the relation can be conditioned by the
institutional setting and, to some extent, by the
profile of agency problems prevailing in each setting. From
a methodological point of view, we do not propose explicit
hypotheses, but we try to find empirical patterns coherent with
the theoretical background, we relate our results to previous
research, and we emphasize the contributions of our research.
3.1. Data. We have collected information on financial
statements (balance sheet and income statement), on equity
market value and on ownership structure from Thomson ONE
Banker. Due to operational constraints given the complexity of
the information about ownership structure, we have not been
able to study all the quoted firms from the sample countries but
have had to take a sample of firms from each country to be
analyzed. The number of firms from each country has been
determined according to the relative economic importance of the
country. As shown in Table 1, our sample includes 4,868
observations from 1,130 firms from 16 nations from Europe,
Asia, Australia, and America between 2000 and 2006. Evidently,
there are
diferences among the number of firms from each country
given the diferent size of the country and the importance of
capital markets. The classification of the institutional setting
is based on the Law & Finance approach, so that firms belong
either to the civil law or to the common law system. Civil law
firms account for 55.5 percent of firms and for 55.9 percent of
observations, whereas common law firms account for 44.5
percent of firms and 44.1 percent of observations.
3.2. Variables. The dependent variables can be classified into
three corporate issues: firm value, ownership structure, and
capital structure. Market value has been defined as the ratio
4
of equity market value to book value (MBE). This variable has
been widely used in previous research and enhances the
comparability of our results [52-56].
Ownership structure has been operationalized on the basis
of the ownership concentration, the identity of the largest
shareholders, and the managerial ownership. We define the
ownership concentration with two variables: the proportion of
shares held by the largest shareholder (C1) and a Herfindahl
index of concentration in the hands of the five largest
shareholders (HERF). We use two variables because, although
HERF variable is a more comprehensive metric
of ownership concentration [57-59], it sufers from severe
limitations for nonlinear specifications of the ownership
structure. Concerning the identity of the largest shareholder, the
information provided by Thomson ONE Banker allows
The firm's value depends on the financial leverage, and on
the ownership structure (measured both by the ownership
concentration and the managerial ownership).
Due to nonlinear efects, we include both variables in linear
and squared terms. We also control for the usual factors.
The second equation is aimed to explain the ownership
concentration (HERF). Given the possibility of endogeneous
relations, this variable depends on the value of the firm, on the
financial leverage and on the control variables. In the third
equation, capital structure depends on the other two
endogeneous variables (the value of the firm and the ownership
concentration) and on the control variables.
Thus, the system of three simultaneous equations can be
stated as follows:
us to scrutinize carefully the nature of the shareholders.
MBE
it
=o
1
+|
1
- LEV +|
2
- C1
it
+|
3
- C1
2
it
Accordingly, we divide the largest shareholders into two groups:
strategic entities and investment managers. Strategic entities are
nonfinancial corporations, individual investors, and families that
hold a stake in a firm for the sake of strategic interests and
controlling purposes. Investment managers are banks, trusts,
mutual and pension funds, insurance companies, and venture
capital whose main orientation is not strategic but rather focused
on financial performance. Managerial ownership has been
defined as INS, the propor- tion of shares owned by inside
shareholders [3]. We have defined LEV to measure financial
leverage as the ratio of the book value of debt to the book value
of equity [14].
We also control for the factors potentially afecting
corporate financial decisions, the ownership structure or
the firm market value [60]. First, we control for the firm size
(SIZE), defined as the log of total assets. Second, we
+|
4
- INS
it
+|
5
- INS
2
+|
6
- SIZE
it
it
+|
7
- RISK
it
+|
8
- ROA
it
+|
9
- OPORT
it
+q
t
+c
it
,
HERF
it
=o
1
+|
1
- LEV +|
2
- MBE
it
+|
3
- SIZE
it
+|
4
- RISK
it
+|
5
- ROA
it
+|
6
- OPORT
it
+q
t
+c
it
,
LEV
it
=o
1
+|
1
- MBE +|
2
- HERF
it
+|
3
- SIZE
it
+|
4
- RISK
it
+|
5
- ROA
it
+|
6
- OPORT
it
+q
t
+c
it
,
(1)
(2)
(3)
control for the performance of the firm through ROA or the
return on assets. Third, we control for growth opportunities
(OPORT) with the intangible assets to total long-term assets
ratio [61, 62]. Fourth, we control for the risk of the firm with
the variance of the ROA from the beginning of the analyzed
period [63, 64]. To control for time, country,
and industry efects, we define a set of year-dummy and
country-dummy variables as well as a set of one-digit SIC
classification industry-dummy variables. In addition, since
there can be some diferences across the analysed countries in
terms of their development, we also control for such efects
through a dummy variable (RICH). This variable is defined
according to the information on GDP per capita provided by the
International Monetary Fund [65]. Consistent with this dataset
the countries above the median value are Australia, Austria,
Belgium, Finland, the Netherlands, Japan, Norway, Sweden, and
the USA.
3.3. Method. Given our aim to analyze the possible simul- taneity
of financial decisions and due to the possible endogeneity of the
ownership structure, we estimate a system of three simultaneous
equations in which each equation is related to one of the issues.
Thus, the dependent variable in the first equation is the value of
the firm, in the second equation the ownership concentration,
and in the third equation the capital structure.
whereq
t
are the dummy variables for time efects and
c
it
is the random error. Time-dummy variables are aimed
to control for macroeconomic factors that could impact
on all the firms in a given moment. Given the significant
diferences between both institutional settings, we run the
system of simultaneous equations separately for civil law and
for common law firms.
The random errors are likely to be correlated across equa-
tions. Accordingly, we should not estimate each equation in
isolation but run a joint test of the three equations. One of the
most widely used estimation methods is the three- stages least-
squares method (3SLS). This procedure provides
efcient estimates when error terms can be correlated across
equations. In the first stage, instrumental variables are
developed for all the endogeneous variables by combining the
other endogeneous variables and the predetermined variables.
In the second stage the estimates are computed based on the
residuals of the two steps estimates for each equation. Finally,
in the third step, a generalized least- squares estimation is done
using the covariance matrix of the second step and using the
instrumental variables instead of the endogeneous variables. We
consider as endogeneous the three, dependent variables: the
firm's value, the capital structure and the ownership
concentration. To avoid outliers that could bias our results, we
run the outlier detection multivariate procedure [66, 67]. This
method provides a suitable dropout of outliers through a
multivariate approach.
5
Table 2: Descriptive statistics. Table 3: Results of the test of means comparison.
Variable Mean Std. dev. Min. Max. Variable Civil law Common law P-value
MBE 2.667 2.251 0.103 30.111 MBE 2.247 3.200 0.000
LEV 2.163 1.690 0.055 12.059 LEV 2.284 2.009 0.000
C1 19.722 21.262 0 99.980 HERF 0.434 0.336 0.000 INS 12.119
9.893 0 79.960 C1 26.524 11.087 0.000 HERF 0.418
0.168 0.2 0.990 INS 13.736 9.904 0.000 SIZE 3.652
0.635 1.274 5.747 SIZE 3.554 3.776 0.000
ROA 0.089 0.060 ÷0.213 0.430 ROA 0.078 0.103 0.000
RISK 0.447 1.057 0 10.611 RISK 0.002 1.012 0.000
OPORT 0.238 0.913 0 0.925 OPORT 0.124 0.344 0.000
Given some concerns about the possible misspecifica- tion
of one equation leading to biased estimates of the other
equations, we provide the Hausman-Wu test [68]. This test
allows checking the validity of the equation-by- equation
estimates against 3SLS under the null hypothesis that any
endogeneity among the regressors would not have
deleterious efects on the estimates. The Hausman-Wu test is
distributed chi-squared with m degrees of freedom, where m
is the number of regressors specified as endogenous in the
original instrumental variables regression. As a robustness
check of the efect of the institutional setting, Tables 4 and
5 report the average treatment efect by comparing outcomes
from both institutional environments [69].
4. Results
4.1. Descriptive Analysis. Table 2 reports the mean, the
standard error, the maximum, and the minimum of the main
variables. In order to underline the diference across legal
environments, Table 3 reports the mean value in each setting
and the P-value for the test of means comparison between both
subsamples.
As shown in Table 3, there are significant diferences
between the civil-law and the common-law firms. Civil-law
firms have higher financial leverage, lower market valuation [70],
more concentrated ownership [23], and higher man-
agerial ownership. There are also significant diferences in the
control variables, with smaller firms and lower performance
in the civil law setting. These firms also run less risk (which
could be related to their lower performance) and have less
growth opportunities.
These results are coherent with previous literature [27,
28] and point at the possibility of diferential efects in each
institutional setting and, thus, the need of a diferential
analysis for civil law and for common law firms.
4.2. Explanatory Analysis. In order to avoid an excessively
complex presentation of the results due to the multiple
interactions among variables, we will focus our analysis
on the answer to the three basic questions: (1) diferential
in?uence of the ownership structure conditional on legal
frameworks; (2) endogeneity of the ownership structure; (3)
interdependence among the mechanisms of corporate
governance.
In Table 4, we report the estimates of the baseline model.
The three upper rows are the estimates of the endogeneous
variables, and below them we report the estimates of the control
variables. As shown in Column (1), there is an oppo- site
in?uence of ownership concentration on the value of the firm
(MBE) in each legal and institutional setting. HERF variable
cannot be included in the system of simultaneous equations due
to the specification problems because the joint inclusion of
HERF, C1, and INS would render impossible the estimation of
the model. Whereas in the civil law setting the ownership
concentration is nonlinearly related to the value of the firm, in
the common law countries there is no relation between the
ownership concentration and the value of the firm. The results in
the civil-law firms can be explained on
the basis of the entrenchment and the convergence efects.
For low levels of ownership, the largest shareholders can try
to extract private benefits, which would have a negative efect
on the value of the firm. Nevertheless, for high enought
owership concentration (the turning point is around 56 percent
of the ownership of the largest shareholder) there is a closer
identification between the interests of the largest shareholder
and the interests of the other shareholders, which should
improve the value of the firm.
This result is consistent with recent literature that shows a
positive in?uence of the ownership concentration on the
performance of the firms in this kind of countries [71- 73].
These authors stress that the ownership concentration, by giving
incentives to the largest shareholders to monitor managers,
reduces the agency con?ict between managers and shareholders.
On the contrary, the lack of relation between the firm's value
and C1 is consistent with the managerial relation rather than the
concentrated ownership being the main agency problem in the
Anglo-Saxon institutional setting [27, 30].
Column (1) in Table 4 also shows an asymmetric efect of
the managerial ownership: while in civil-law firms there is a
nonlinear relation with the value of the firm, in the common- law
environment the managerial ownership does not have any
significant impact on the firm's value. This result can be
explained by institutional issues since managers in the civil-law
firms are more identified with shareholders, so that managerial
ownership works as a mechanism of corporate control
complementary to the ownership concentration.
6
Thus, to some extent, in the civil-law firms the managerial
ownership replies the efect of the ownership concentration.
Results reported in Column (2) of Table 4 also corrob-
orate the endogeneity of the ownership structure since the
ownership concentration is afected by the value of the firm.
Thus, there is a mutual interaction between firm's value
and the ownership structure. Moreover, the value of the
firm has a diferential efect on the ownership concentration
conditional on the institutional setting: while in civil-law
countries the firms with higher market value have more
concentrated ownership, in common law firms we detect the
opposite relation. In addition, ownership structure depends not
only on the value of the firm but also on the financial leverage,
growth opportunities, risk, and firm performance. Interestingly,
the sign of the impact of financial leverage is
diferent in each institutional setting.
As far as financial decisions are concerned, Column
(3) in Table 4 shows that capital structure and ownership
structure are taken simultaneously. Once more, the efect
of the ownership structure is diferent in each institutional
environment: in civil-law firms both mechanisms are com-
plementary, with positive interaction between them; on the
contrary, the capital structure and the ownership structure are
alternative mechanisms of control in common law firms. The
value of the firm is also related to financial leverage with a negative
direction of causality. This result can be explained by the
pecking-order theory [41], since firms with more
ability to generate internal funds are less leveraged.
All the estimates include time, country, and industry control
dummies. We also report the Hausman-Wu test
of specification and the average treatment efect on the
treated. According to the Hausman test, the possibility of
misspecification of the model can be ruled out. The average
treatment efect on the treated is always significant and
lends support to the rejection of the null hypothesis of no
diferences between both sub-samples. We also report the R-
squared coefcient for each equation.
Therefore, our results point at a diferential efect of the
ownership structure on the value of the firm depending on
the legal environment, at the endogeneity of the ownership
structure, and at the relation between capital structure and other
mechanisms of corporate governance. In order to have a more
in-depth view of the relation between ownership concentration
and firm's value we perform an additional analysis splitting up
the sample conditional on the nature of the largest shareholder:
investment manager versus strategic entity.
The results of this analysis are reported in Table 5 and
provide interesting insights. As one can see in Col- umn (1) in
Table 5 the ownership concentration has a
nonlinear efect on the value of the firms whose largest
shareholder is a strategic entity. Since strategic entities
usually hold a stable stake in the ownership of the firm, this
result confirms the duality of alignment versus entrenchment
problems related to strategic entities as large shareholders. On
the contrary, the ownership concentra- tion in the hand of
investment managers has a linear negative impact on the value
of the firms. This result can be explained by the short-term
orientation of such
shareholders, so that too big stakes could destabilize the strategy
of the firm [18, 74]. All the other relations are
basically unafected, which corroborates the fact that the
ownership structure is endogeneously determined with the
value of the firm and that financial decisions are taken
simultaneously with other mechanisms of corporate con- trol.
According to the Hausman-Wu test, the model is not
badly specified. The average treatment efect on the treated
allows rejecting with a high confidence level the hypothesis
that both sub-samples are the same and, therefore, we can accept
that the each kind of largest shareholder has specific
features. We also report the R-squared coefcient for each
equation.
The results reported previously raise two questions: the
efect of the country development, and the possibility of
managerial ownership replicating the efect of ownership
concentration. Thus, the estimates in Table 6 shows two
specific issues: first, we introduce C1DEV and C1DEV
2
, two
interacted variables computed as the product of RICH and both
C1 and C1
2
. These variables illustrate the specific
efect of ownership concentration in the more developed or
richer countries. Second, we introduce a cubical efect of the
managerial ownership [38].
These new estimates stress the need to control for
international issues such as the economic development and the
institutional environment. Column (1) in Table 6 shows
the asymmetric efect of the largest shareholder stake: a
nonlinear relation for civil law firms, and the lack of
relation for common law firms. More interestingly, C1DEV
and C1DEV
2
play a moderating efect (with the opposite
in?uence of C1 and C1
2
). These results mean that, in the
more developed countries, ownership concentration has a U-
inverted in?uence that can counterbalance the in?uence of C1
and C1
2
. This is in line with some recent research
about the diferential efects of ownership for less developed
European countries [32].
Also according to Column (1) in Table 6, the managerial
ownership has a significantly diferent efect in each legal
setting. Whereas in common-law firms managerial owner-
ship does not have any relevant efect on the value of the
firm, in civil-law firms there is a cubical relation with three
diferent phases. There is an initial positive in?uence of
managerial ownership on the value of the firm, according to
the hypothesis of convergence of interests. Then, the relation
turns into a negative one and, after a certain threshold, the
relation becomes positive again. These results make sense since,
for high enough managerial ownership, there is an identification
between shareholders and managers, with a positive in?uence on
the value of the firm.
Once again, the other two key ideas of our research hold
too. As shown in column (2), the value of the firm and the
capital structure are significant determinants of the ownership
structure, so that the ownership structure becomes an
endogenous issue. Column (3) reports that both the ownership
concentration and the value of the firm have significant in?uence
on the capital structure. The checks for the specification of the
model support the validity of the estimates too.
7
Table 4: System of simultaneous equations estimates: baseline model.
Civil Common Civil Common Civil Common
(1) MBE (2) HERF (3) LEV
LEV 1.707
---
1.302
---
---0.215 0970
---
(0.333) (0.332) (0.043) (0.035)
MBE 0.118
---
÷0.744
---
÷0.549
--
0.766
---
(0.044) (0.168) (0.284) (0.173)
HERF 4.091
---
1.030
---
(0.213) (0.048)
SIZE ÷1.151
---
÷0,384
--
÷0.170
---
÷0.284
---
0.756
---
0.292
---
(0.217) (0.163) (0.032) (0.105) (0.092) (0.108)
OPORT ÷0.013 ÷0.007 ÷0.004
---
÷0.005 ÷0.019
--
÷0.005
(0.009) (0.004) (0.001) (0.004) (0.008) (0.004)
--- -- ÷3.874 -- -- -RISK 31.893 0.013 0.010 16.656 0.010
--
(5.231) (0.006) (1.647) (0.005) (8.262) (0.005)
ROA 26.884
---
24.371
---
0.849
---
18.134
---
÷3.790
---
÷18.689
---
(3.295) (1.530) (0.786) (3.424) (3.315) (3.517)
C1
÷0.034
---
÷0.008 -
(0.011) (0.004)
C1
2
0.000
--
0.000
(0.000) (0.000)
INS ÷0.047
---
÷0.000
(0.011) (0.001)
INS
2
0.000
---
÷0.000
(0.000) (0.000)
Country efect Yes Yes Yes Yes Yes Yes
Industry efect Yes Yes Yes Yes Yes Yes
Year efect Yes Yes Yes Yes Yes Yes
Observations 1176 1608 1176 1608 1176 1608
Average treatment efect ÷0.1504
---
(0.0062) 1.2545
---
(0.2082) ÷1.4443
--
(0.7152)
Hausman-Wu test 82.41
---
66.35
---
11.36
---
12.73
---
27.84
---
65.97
---
R2 0.4704 0.3410 0.1988 0.3756 0.2964 0.2760
Estimated coefcients and (standard deviation) of the systems of simultaneous equations. The endogeneous variables are financial leverage (LEV), MBE (ratio
of equity market to book value), and HERF (Herfindahl index of ownership concentration). The exogeneous variables are return on assets (ROA), the size
of the firm (SIZE), the growth opportunities (OPORT), the risk of the assets (RISK), the percentage of shares held by the largest shareholder (C1) and the percentage of
shares held by the managers (INS).
---
,
--
,
-
stand for significant at 99%, 95%, and 90% confidence levels. The Chow test allow testing the null hypothesis that both estimations are from the same
sample. All the estimations include time-dummy variables.
5. Concluding Remarks
Recent research in corporate finance based on the agency the- ory
and on the economics of information has tried to explain the
interrelations among corporate ownership structure, cor- porate
capital structure, and corporate value. The relevance of the
ownership structure (ownership concentration, man- agerial
ownership, and the nature of the largest shareholders) and of the
capital structure is due to be two prominent mech- anisms of
corporate governance that can curb the con?icts of interests
inside the firm. Our research assumes that both
mechanisms are designed simultaneously in order to achieve the
optimal corporate governance. Thus, we follow a growing field of
the literature that states that the capital structure and the
ownership structure are endogenously determined inside the
firm, so that there may be mutual inter-causality.
Our paper is also founded on the Law & Finance
approach, according to which the legal and institutional
environment has a significant impact on the corporate control.
Whereas in the so-called common-law countries the most
important con?ict is the one between managers and
shareholders, in the civil-law countries the most significant
8
Table 5: System of simultaneous equations estimates: type of large shareholders (investment managers versus strategic entities).
IM SE IM SE IM SE
(1) MBE (2) HERF (3) LEV
LEV 1.111
---
1.629
---
0.174
---
0.243
---
(0.343) (0.360) (0.043) (0.084)
MBE ÷0.154
---
÷0.146
---
÷2.292 0.215
(0.041) (0.046) (2.428) (0.264)
HERF 3.891 2.165
---
(5.710) (0.215)
SIZE ÷0.656
---
÷1.403
---
÷0.103
---
÷0.210
---
0.001 0.739
---
(0.194) (0.247) (0.026) (0.056) (0.681) (0.079)
OPORT ÷0.061 0.146
---
÷0.000 ÷0.005
---
÷0.058 0.007
(0.020) (0.032) (0.000) (0.001) (0.046) (0.009)
RISK 0.079 ÷0.318
---
0.012 0.003
--
0.407 ÷0.009
-
(0.088) (0.082) (0.013) (0.001) (0.420) (0.005)
--- --- -- ---ROA 23.827 26.898 3.685 3.975 41.075 ÷11.398
---
(1.624) (3.445) (0.945) (1.256) (47.507) (3.452)
C1 ÷0.034 ÷0.023
--
(0.026) (0.011)
C1
2
÷0.000 ÷2E÷04
-
(0.000) (1E÷04)
INS 0.000 0.000
(0.003) (0.011)
INS
2
÷0.000 0.000
(0.000) (0.000)
Country efect Yes Yes Yes Yes Yes Yes
Industry efect Yes Yes Yes Yes Yes Yes
Year efect Yes Yes Yes Yes Yes Yes
Observations 1575 1206 1575 1206 1575 1206
Average treatment efect ÷0.2442
---
(0.0054) 0.4042
--
(0.2285) ÷0.6499
---
(0.0355)
Hausman-Wu test 75.55
---
21.33
---
21.98
--
32.74
---
10.29
---
31.72
---
R
2
0.4072 0.3443 0.2698 0.2793 0.2757 0.3077
Estimated coefcients and (standard deviation) of the systems of simultaneous equations. Regressions are run according to the nature of the largest
shareholder: investment manager (IM) or strategic entity (IE). The endogeneous variables are financial leverage (LEV), MBE (ratio of equity market to book
value) and HERF (Herfindahl index of ownership concentration). The exogeneous variables are return on assets (ROA), the size of the firm (SIZE), the growth opportunities
(OPORT), the risk of the assets (RISK), and the percentage of shares held by the largest shareholder (C1) and the percentage of shares held by the managers (INS).
---
,
--
,
-
stand for significant at 99%, 95%, and 90% confidence levels. The Chow test allow testing the null hypothesis that both estimations are from the same simple. All the estimations include time-dummy
variables.
agency problem arises due to the possible expropriation of
minority shareholders by large dominant shareholders.
We analyze the mutual relations between ownership
structure, capital structure, and the value of the firm for a sample
of 1,130 firms from France, Italy, Portugal, Spain, the
Netherlands, Belgium, Greece, Germany, Japan, Austria,
Norway, Sweden, Finland, Australia, USA, and UK between
2000 and 2006. We use the simultaneous equations method.
Our results suggest significant diferences conditional on the
legal and institutional setting. In the civil-law countries there
is a U-shaped relation between ownership concentration
and the value of the firm: a negative relation for low levels of
concentration, and a positive relation for high enough
concentration. On the contrary, in the common-
law countries there is a positive efect of the ownership
concentration on the value of the firm.
This asymmetric in?uence can be explained on the basis of
the entrenchment and convergence of the largest share- holders'
interests in the civil law firms. In this environment, the ownership
is more concentrated so the main con?ict is the one between
dominant shareholders and minority shareholders. In the civil-
law setting, we also find that the
9
Table 6: Systems of simultaneous equations estimates: cubical efect of managerial ownership.
Civil Common Civil Common Civil Common
(1) MBE (2) HERF (3) LEV
LEV 1.886
---
0.658
-
0.224
---
÷0.211
---
(0.365) (0.348) (0.036) (0.019)
MBE 0.100
---
÷0.289
---
÷0.419
--
1.370
---
(0.036) (0.048) (0.194) (0.266)
HERF 3.680
---
4.669
---
(0.170) (0.313)
SIZE ÷1.268
---
÷0.287
-
÷0.177
---
÷0.085
---
0.742
---
0.402
---
(0.240) (0.167) (0.028) (0.031) (0.080) (0.150)
OPORT ÷0.015 ÷0.011
--
÷0.004
---
÷0.003
---
0.017
--
0.014
--
(0.009) (0.004) (0.001) (0.001) (0.007) (0.006)
RISK 32.672
---
0.014
--
÷3.351 --
0.004
---
12.469
--
÷0.021
---
(5.463) (0.006) (1.432) (0.001) (6.447) (0.007)
ROA 28.524
---
21.658
---
1.138
-
6.362
---
÷5.141
--
÷30.083
---
(3.600) (1.620) (0.646) (1.005) (2.329) (5.360)
÷0.047 ---C1 ÷0.022 --
(0.014) (0.010)
C1
2
0.000
---
÷0.000
(0.000) (0.000)
--
C1DEV 0.042 0.0046
(0.019) (0.013)
C1
2
DEV ÷0.001
---
0.001
(0.000) (0.001)
INS ÷0.083
---
0.001
(0.019) (0.018)
INS
2
0.001
---
÷0.000
(0.000) (0.000)
INS
3
÷0.000
---
0.000
(0.000) (0.000)
Country efect Yes Yes Yes Yes Yes Yes
Industry efect Yes Yes Yes Yes Yes Yes
Year efect Yes Yes Yes Yes Yes Yes
Observations 1176 1608 1176 1608 1176 1608
Average treatment efect ÷0.2394
--
(0.1381) 0.2739
--
(0.0820) ÷0.5550
---
(0.1352)
Hausman-Wu test 23.74
---
29.91
---
53.82
---
68.26
---
36.68
---
27.93
---
R2 0.3589 0.4716 0.2345 0.2105 0.2962 0.2758
Estimated coefcients and (standard deviation) of the systems of simultaneous equations. The endogeneous variables are financial leverage (LEV), MBE (ratio
of equity market to book value), and HERF (Herfindahl index of ownership concentration). The exogeneous variables are return on assets (ROA), the size
of the firm (SIZE), the growth opportunities (OPORT), the risk of the assets (RISK), the percentage of shares held by the largest shareholder (C1), and the percentage of
shares held by the managers (INS).
---
,
--
,
-
stand for significant at 99%, 95%, and 90% confidence levels. The Chow test allow testing the null hypothesis that both estimations are from the same
simple. All the estimations include time-dummy variables.
degree of development of the country plays a relevant role, since
the ownership concentration has an opposite impact in the most
and in the least developed countries.
The nature of the largest shareholder also provides inter-
esting insights. Our data show that the entrenchment efect
is specially prevailing when the largest shareholder holds a stable
stake as most of the strategic entities (i.e., nonfinancial
corporations, individual investors, and families) do.
The efect of managerial ownership is also afected by
the institutional environment, with a significant in?uence
10
in the civil-law countries and no in?uence in the common- law
countries. This result can be explained since in the civil- law
setting the managerial ownership and the ownership
concentration work as complementary mechanisms of cor-
porate control. A more in-depth analysis shows that this relation
is better specified in the civil law countries through a cubic
relation. In this way, there is a convergence of interest between
shareholders and managers both for low levels and for very high
levels of managerial ownership.
Our results also support the double causal relation between
the ownership structure and firm's value. This result corroborates
the idea of endogeneity by showing that the ownership structure
is not only a significant determinant of the value of the firm, but
also it is an outcome of the value of the firm.
Finally, we detect an interrelation between financial leverage
and ownership structure conditional on the legal environment.
Whereas both mechanisms work as comple- mentary
mechanisms in the civil law system, they seem to be substituting
mechanisms in the common law firms.
Acknowledgments
This paper has benefited from the comments of two anony-
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