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Review of Managerial Science

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01.07.2013 | Original Paper

Effects of corporate equity ownership on firm value

verfasst von: Friedel Drees, Mark Mietzner, Dirk Schiereck

Erschienen in: Review of Managerial Science | Ausgabe 3/2013

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Abstract

We investigate the valuation effects related to corporate minority block purchases for a European sample of 113 purchases over 1993–2006. We argue that corporate block ownership, as opposed to institutional or individual block ownership, has several unique characteristics and can create significant short- and long-term wealth for target and acquiring firm shareholders. Because target firms that exhibit signs of inefficient monitoring or agency problems benefit the most, we conclude that corporate block ownerships can align incentives and mitigate information problems in corporate business relationships.

Vorheriger Artikel Capital structure decisions in family firms: empirical evidence from a bank-based economy

Nächster Artikel International business taxation and the business cash flow tax

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See, e.g., Mikkelson and Ruback (1985), Wruck (1989), Choi (1991), Hertzel and Smith (1993), and Ferguson (1994).

For a prominent example, consider Daimler Chrysler’s acquisition of a block minority stake in Tognum, a supplier of diesel engines, for €585 million in 2008. Three years earlier, Daimler Chrysler had sold its entire interest in Tognum to Swedish financial investor EQT. By (re)purchasing an equity block in Tognum, Daimler Chrysler aimed to protect its long-term supply relations (see Financial Times Germany 2008).

Following Choi (1991), we define minority block equity purchases as acquisitions of 5–49.9 % of outstanding shares.

Croci (2007) studies block equity purchases by corporate raiders in Europe between 1990 and 2001.

Besides the agency cost perspective, the role of free cash flows in motivating takeovers is widely recognized. Smith and Kim (1994) argue that acquisitions that reduce free cash flow should generate higher gains to the bidder’s shareholders. Their work suggests that targets with relatively high levels of free cash flows may be more attractive takeover candidates. And, because minority block purchases by another corporation often serve as a “toehold” for a subsequent takeover, the capital markets may perceive the likelihood for a subsequent transfer of full control as more likely if the target has relatively high cash flows.

European competition laws provide a specific process to handle cases where minority shareholdings lead to collusion or de facto control. However, the existing regulations do not cover the full range of potential anti-competitive effects in minority investments. See Ezrachi and Gilo (2006), Russo and Francesco (2006), and Milanesi et al. (2002) for detailed discussions of the anti-competitive concerns related to EU minority shareholdings.

We are grateful to our anonymous referee for this suggestion to link our analysis with this research on corporate venture capital.

We use information obtained from Factiva^® to identify the transactions that relate to criterion (8).

The reasons for the seventy-two manual exclusions are as follows: the existence of prior ownership positions not reported in the SDC database (44), a block purchase leading to de facto majority control (19), transactions within one corporate entity (5), no corporate buyer (3), and no equity purchase (1).

Hecker (1999) systematically identifies thirty-one industries in which the number of R&D workers and technology-oriented occupations accounts for a proportion of employment that is at least twice the average of all industries included in the analysis.

Demsetz and Lehn (1985) argue that systematic industry regulation restricts the strategic options available to owners. They further assume that regulation provides some subsidized disciplining and monitoring of the management of regulated firms. As a result, they posit that both the potential for value-enhancing activities by a corporate blockholder (e.g., takeovers) and the incremental benefits from monitoring should decrease. This effect would lower the returns from corporate block purchases.

Campa and Hernando (2004) consider minerals, primary metals, transportation, communication, electricity, gas, sanitary services, and financial institutions as regulated industries in all EU member countries. These industries correspond to the following two-digit SIC codes, respectively: 10, 13, 33, 40, 44–45, 48–49, 60–61, and 80.

Any further empirical distinction between new and existing alliances or joint ventures did not qualitatively alter our empirical findings.

We have already excluded transactions made with a stated takeover intention and those in the middle of a tender offer (see Sect. 3.1).

A detailed explanation of the buy-and-hold abnormal return calculation is given in Sect. 3.3.

Infrequent trading positively affects stock returns. Therefore, we calculate the Amihud (2002) illiquidity measure (ILLIQ) as the daily ratio of absolute stock returns to their dollar volume, averaged over various calendar years prior to the year the announcement occurred. Our results remain unchanged when we exclude observations with extreme ILLIQ values. For robustness, we also use the constant mean model or the simple market model to calculate abnormal returns; our results are similar. Tables are available from the authors upon request.

To validate the results of our market model, we re-estimate the abnormal returns for our time intervals using a mean-adjusted return model (as proposed by Brown and Warner 1985), as well as different benchmarks in the single-factor mode. Our results remain robust. Tables are available from the authors upon request. We thank the referee for suggesting this robustness test.

We also apply the Lyon et al. (1999) test to control for the skewness bias, as well as the Wilcoxon rank sum z-score. Tables are available from the authors upon request.

Using another event window (e.g., [−10;1]) as the dependent variable leads to the same qualitative results.

In unreported tables, we calculate variance inflation factors to detect collinearity problems. We found no multicollinearity.

We calculate market share based on sales, but in robustness checks we also base it on year-end market capitalization and total assets. Additionally, we use two- and three-digit SIC codes. Our results remain stable. Tables are available from the authors upon request.

In unreported tables, we also calculate the abnormal returns of the announcement day and other short-term event windows. The results remain quantitatively and qualitatively similar. Tables are available from the authors upon request.

We thank an anonymous referee for pointing this out.

Although the market-to-book ratio is available for all targets, we do not include the nine observations with negative values in our analysis.

Our results remain stable when we use value-weighted buy-and-hold abnormal returns or value-weighted calendar-time abnormal returns. Tables are available from the authors upon request.

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Titel: Effects of corporate equity ownership on firm value
verfasst von: Friedel Drees
Mark Mietzner
Dirk Schiereck
Publikationsdatum: 01.07.2013
Verlag: Springer-Verlag
Erschienen in: Review of Managerial Science / Ausgabe 3/2013
Print ISSN: 1863-6683
Elektronische ISSN: 1863-6691
DOI: https://doi.org/10.1007/s11846-012-0080-2

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