A Cross-Country Investigation of Blockholder Effects on Corporate Performance

A Cross-country Investigation of Blockholder Effects on Corporate Performance

Introduction

During the last twenty years corporate governance has been widely researched, which has led to important findings with regard to ownership structure and its determinants. La Porta and Colleagues (1998) find that shareholder protection is positive correlated with widely held firms and larger financial markets. La Porta, Lopez-de-Silanes, and Shleifer (1999) subsequently find that countries with common law have larger financial markets and provide better opportunities for external funding. At the same time, however, Jensen and Meckling (1976) describe agency costs, which are theoretically diminished with concentration of ownership to a certain point.

This creates an interesting contradiction. The abovementioned does not necessarily contradict each other’s validity. However, it does suggest that if we define the optimal ownership structure as the point of ownership concentration that maximizes the profitability of the corporation, then this optimal ownership structure should be lower in countries with common low and dispersed ownership than in the differing countries, or they should perform worse. Furthermore, the success of countries with highly dispersed ownership raises questions about the significance of the agency costs described by Jensen and Meckling (1976).

This study investigates whether there is a positive correlation between ownership concentration and corporate performance in Denmark and Great Britain respectively. The study will also deal with how and why the results may differ between the two countries.

I expect to find that the British corporations generally have a lower ownership concentration to there Danish counterparts, and that their optimal ownership concentration, if one such exist, should be lower compared to the Danish because of the trade-off from wider access to external finance. Furthermore, if positive effects from ownership concentration exist, these firms should be expected to perform better than their widely held competitors. Theoretically this implies that Danish firms should be performing better if they are more concentrated. However, this would be a surprising finding. Nevertheless, it should still be interesting to compare the corporate performance of Danish and British firms when taking into consideration their different ownership structures, since it indicates if blockholders are significant in reducing agency cost, or if countries can substitute ownership concentration for other governance settings with success.

Research Questions

The overall question of the study is whether there is a positive correlation between ownership structure and corporate performance. However, there are also a number of sub questions: it must first be answered how corporations in both countries organize