Emerging Capital Markets AG907 M.Sc. Investment & Finance - PowerPoint PPT Presentation

Emerging Capital Markets AG907 M.Sc. Investment & Finance M.Sc. International Banking & Finance Lectures 5 & 6 – Ownership Structure in Emerging Capital Markets I g n a c i o R e q u e j o – G l a s g o w , 2 0 1 0 / 2 0 1 1

Overview of Lectures Two main Parts I. Corporate Ownership Worldwide (based on La Porta et al. , JF, 1999) II. Ownership Structures in East Asia (based on Claessens et al. , JFE, 2000) E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 1

Lectures 5 & 6 – Part I Corporate Ownership Worldwide E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 2

I. Corporate Ownership Worldwide I.1. Introduction I.2. Data Set & Sample Coverage I.3. Different Types of Control I.4. Ownership vs. Control I.5. Controlling Shareholders Worldwide I.6. Means of Achieving Control I.7. Separation Control–Ownership I.8. The Special Case of Family Control I.9. Main Conclusions E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 3

I.1. Introduction Evidence on ownership structures of 20 largest publicly traded firms in 27 economies (also smaller firms to keep size constant across countries) Focus on largest firms in richest economies ⇒ For these firms likelihood of dispersed ownership is greatest Principal contribution: Find identities of ultimate owners of capital & voting rights in firms (when shares in a firm are owned by another company ⇒ examine ownership of that company) E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 4

I.1. Introduction Two main questions of study 1. How common are widely held firms vs. firms with owners with significant voting rights? 2. Among firms with significant owners ⇒ Who are they (families, state, financial institutions, other firms)? Bottom line: Challenge view that dispersed ownership is common pattern around the world E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 5

I.2. Data Set & Sample Coverage Companies from 27 countries (richest countries based on 1993 per capita income) For each country, two samples of firms i) Top 20 firms ranked by market cap. at end of 1995 (“large firms”) ii) Smallest 10 firms in each country with market cap. of at least $500 million at end of 1995 (“medium firms”) E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 6

I.2. Data Set & Sample Coverage Final sample ⇒ 540 large firms & 691 firms in total To identify ultimate owners ⇒ Shareholders who control over 10% of votes The 10% cut-off point used because 1) It provides significant threshold of votes 2) Most countries mandate disclosure of 10% ownership stakes E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 7

I.3. Different Types of Control Definitions of ownership rely on voting rights (rather than CF rights) ⇒ Focus on who controls corporations? Do corporations have shareholders with substantial voting rights (directly or through chain of holdings)? Firms divided into: Widely held & with ultimate owners (5) 1) Family or individual 2) The State 3) Widely held financial institution (bank, insurance co.) 4) Widely held corporation 5) Miscellaneous (cooperative, voting trust, etc.) E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 8

I.3. Different Types of Control State control as separate category ⇒ State uses firms to pursue political objectives but public pays for losses Widely held corps. & widely held financial institutions ⇒ Interest of bank ownership Corp. has UO if shareholder’s direct & indirect voting rights > 20%; Indirect ownership of X% in firm A 1) Shareholder directly controls firm B, which in turn directly controls X% of votes in firm A 2) Shareholder directly controls firm C, which in turn controls firm B (control chain), which directly controls X% of votes in firm A E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 9

I.4. Ownership vs. Control Definition of ownership (CF rights) & definition of control (voting rights) Separation of CF & voting rights ⇒ Deviations from one- share–one-vote, pyramidal structures, cross-holdings E.g.: Family owns 11% stock of Firm A, which in turn has 21% stock of Firm B ⇒ Family owns 2% CF rights of Firm B (product of ownership stakes in chain) but family controls 11% of Firm B (weakest link in control chain) E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 10

I.4. Ownership vs. Control Example of indirect ownership & control 11% 21% Family Firm A Firm B Family links to Firm B: Ownership (CF rights) = 0.11 * 0.21 = 2% Control (voting rights) = Min (0.11 ; 0.21) = 11% E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 11

I.4. Ownership vs. Control E.g.: Family owns 11% stock of publicly traded Firm A, which in turn has 21% stock of Firm B; & same family owns 25% Firm C, which in turn owns 7% Firm B Looking at control rights ⇒ Family controls 18% of Firm B, (sum of weakest links in chains of voting rights) but family owns about 3.5% of CF rights of Firm B (sum of products of ownership stakes along two chains) E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 12

I.4. Ownership vs. Control Example of indirect ownership & control Firm A 11% 21% Family Firm B 25% Firm C 7% Family links to Firm B: Own. (CF rights) = (0.11*0.21) + (0.25*0.07) = 3.5% Con. (voting rights) = Min(0.11;0.21) + Min(0.25;0.07) = 18% E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 13

I.5. Controlling Shareholders Worldwide 27 countries divided in two groups ⇒ 1. High protection 12 with better than median shareholder protection 2. Low protection ⇒ 15 with median & worse than median protection Within each country (for given sample & given definition of control) firms classified in one of six types; then compute frequency of each type in each country E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 14

I.5. Controlling Shareholders Worldwide Sample of large firms & using 20% definition • 36% widely held, 30% family-controlled, 18% state- controlled & 15% in residual categories • Using this definition, all 20 UK firms, 18 out of 20 Japanese firms & 16 out of 20 US firms are widely held • In Argentina, Greece, Austria, Hong Kong, Portugal, Israel or Belgium, few widely held firms ⇒ Exception of dispersed ownership Important to understand corporate governance in most countries E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 15

I.5. Controlling Shareholders Worldwide Principal owner types ⇒ Families & state • High percentage of state-controlled companies (70% in Austria, 45% in Singapore & 40% in Israel & Italy) ⇒ Largest firms, unfinished privatization in most countries & massive post-war state ownership in the world Dominant form of controlling ownership in the world ⇒ • By families (not by banks or other corporations) E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 16

I.5. Controlling Shareholders Worldwide Comparison of countries with good & poor shareholder protection ⇒ Widely held firms more common in countries with good protection (48% vs. 27%) Countries with poor shareholder protection ⇒ More of most other types of firms: family-controlled (34% vs. 25%), state-controlled (22% vs. 14%) Dispersion of ownership + good shareholder protection ⇒ Enables shareholders to divest at attractive prices E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 17

I.5. Controlling Shareholders Worldwide Sample of large firms & using 10% definition • In rich world as a whole, dispersed ownership is rare • Many Japanese firms shift into miscellaneous category ⇒ Controlled by groups with no dominant members • Japanese corporate ownership closer to US & UK than to Continental European model ⇒ Bottom line Largest firms typically have UOs, particularly in countries with poor shareholder protection E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 18

I.5. Controlling Shareholders Worldwide Sample of medium-sized firms & using 20% definition • World average incidence of dispersed ownership = 24% compared to 36% for large firms ⇒ Going down in size = effect as relaxing strictness of control definition • But in US & UK medium firms remain mostly widely held ⇒ Attractiveness of selling out • Percentage of firms controlled by families (dominant ownership pattern) rises to world average of 45% E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 19

I.5. Controlling Shareholders Worldwide Comparison of countries with good & poor shareholder protection ⇒ Widely held firms (38% vs. 13%) Family (39% vs. 50%) & state control (9% vs. 20%) more frequent in poor protection environments Even using 20% definition, medium firms generally have owners (especially when shareholder protection is poor) Using 10% definition, predominant ownership pattern is family control (regardless of shareholder protection) E m e r g i n g C a p i t a l M a r k e t s – I g n a c i o R e q u e j o 20