OWNERSHIP STRUCTURE IN U.S. CORPORATIONS Mohammad Rahnamae A Thess n the John Molson School of Busness Presented n Partal Fulfllment of the Requrements For the Degree of Master of Scence (Busness Admnstraton) at Concorda Unversty Montreal, Quebec, Canada May 2012 Mohammad Rahnamae, 2012
ABSTRACT Ownershp Structure n U.S. Corporatons Mohammad Rahnamae, M.Sc. Concorda Unversty, 2012 Very lttle s known about the ownershp structures of Amercan corporatons and even less about the nfluence dfferent ownershp structures have on a blockholder s power n the frm. In ths paper, we am to fll these gaps n the lterature. Frst, we provde a comprehensve descrpton of ownershp structures of US frms. Second, we show that due to dfferences n ownershp structures, blockholders wth smlar ownershp stakes may have a sgnfcantly dfferent nfluence n the frm. Thrd, we develop a measure of the nfluence of the ownershp structure on a blockholder s power and show that an average blockholder can lose as much as 12% of hs potental power due to the presence and sze of the ownershp stakes of other blockholders. Fourth, we show that ths nfluence of ownershp structure vares systematcally wth a blockholder s rank and dentty, wth the second and non-famly manager blockholders experencng the largest loss of power.
Wth my deepest grattude, I thank and dedcate ths dssertaton to my Mom and Dad: Fereshteh & M.Hossen To my Maryam v
Acknowledgements Thanks are due frst to my supervsor, Dr. Imants Paegls. I am deeply ndebted for hs constant support and gudance throughout the work on ths thess. Many thanks to Dr. Nlanjan Basu who offered support and gudance. And fnally, thanks to my parents and frends who have always been there for me. v
TABLE OF CONTENTS LIST OF FIGURES... v LIST OF TABLES... v 1. Introducton... 1 2. Data and sample selecton... 6 2.1. Sample selecton... 6 2.2. Blockholders and ownershp... 7 3. Emprcal tests and results... 8 3.1. Ownershp structure... 8 3.2. Shapley value...11 3.3. Shapley value and ownershp... 12 3.4. Benchmark Shapley value, ownershp, and loss of power... 13 3.5. Loss of power and rank... 14 3.6. Loss of power and dentty... 18 4. Dscusson and conclusons... 21 Appendx A... 24 Appendx B... 25 References... 26 Fgures... 27 Tables... 29 v
LIST OF FIGURES Fgure 1 - Shapley value vs. ownershp n the newly-publc sample... 27 Fgure 2 - Shapley value vs. ownershp n the S&P500 sample... 28 v
LIST OF TABLES Table 1 - Sample selecton and dstrbuton of newly publc and S&P500 frms by year 29 Table 2 - Sample characterstcs... 30 Table 3 - Ownershp structure of newly-publc frms and S&P500 frms... 31 Table 4 - Blockholder dentty and ownershp... 33 Table 5 - Shapley value and blockholder ownershp... 35 Table 6 - Shapley value and the loss of power... 36 Table 7 - Summary statstcs of the loss of power by blockholder rank... 37 Table 8 - Loss of power and blockholder rank... 38 Table 9 - Summary statstcs of the loss of power by blockholder dentty... 40 Table 10 - Loss of power and ndvdual blockholder dentty... 41 v
1. Introducton Very lttle s known about the ownershp structures of Amercan corporatons. In fact, untl recently the domnant paradgm was that there are few blockholders present n US frms (see, e.g., Holderness, 2009; Gadhoum, Lang, and Young, 2005). Even less s known about the nfluence of dfferent ownershp structures on a blockholder s power n the frm. 1 In ths paper, we am to fll these gaps n the lterature. Frst, we provde a comprehensve descrpton of ownershp structures of Amercan corporatons. 2 Second, we show that, due to dfferences n ownershp structures, blockholders wth smlar ownershp stakes may have a sgnfcantly dfferent power n the frm. Thrd, we show that the nfluence of ownershp structure on a blockholder s power vares systematcally wth her rank and dentty. Consder the followng three examples from our sample. Frst, on March 22, 1999, Qwest Communcatons Internatonal Inc., an S&P500-lsted telecommuncatons company, had two blockholders. The company s founder, Phlp F. Anschutz, owned 45.7% of the outstandng shares and FMR Corp (Fdelty Management and Research Corp), owned 6.2%. Second, as of May 15, 2003, the ownershp structure of elnear Inc. (nformaton technology solutons provder founded n 1995) was as follows: Kevan M. Casey, Presdent of the company, owned 45%; Tommy Allen, Senor Vce Presdent and Drector, 45%, and Jon V. Ludwg, CEO and Charman of the board, 6% of the shares. Thrd, as of March 8, 1996, General Dynamcs, an S&P500-lsted aerospace and defense company, had the followng fve blockholders. The Crown and Goodman famles owned 12.9% of the outstandng shares, FMR Corp 9%, Warren E. Buffett and afflates 7.7%, Delaware Management Holdngs, Inc 5.6%, and The Northern Trust Company, actng as the trustee of the General Dynamcs Corporaton Savngs and Stock Investment Plan, 9.5%. The above examples hghlght some of the varaton n the ownershp structures of our sample frms. Frst, we fnd a large varaton n the number of blockholders across frms from 1 Throughout the paper we wll use the terms power and nfluence nterchangeably. 2 Our defnton of ownershp structure ncludes two dmensons the number of blockholders present n a frm and the sze of ther ownershp stakes. 1
frms wth no blockholders to frms wth ten blockholders. Second, we show that, even after controllng for the number of blockholders, there s a large varaton n the ownershp stakes of varous blockholders. These varatons n the ownershp structure have a drect and sgnfcant nfluence on the power welded by a blockholder n a frm. Intutvely, the power of a partcular blockholder depends upon two factors: (1) the sze of her ownershp stake and (2) ownershp structure (.e., the presence of other blockholders and the sze of ther ownershp stakes). Whle power generally ncreases wth the level of ownershp, the ownershp structure can ether mtgate or magnfy ths nfluence. Compare, for example, the case of Mr. Anschutz wth that of Mr. Casey n the Qwest Communcatons and elnear examples, respectvely. Both of them hold ownershp stakes of smlar sze. Yet, t s clear that the power welded by Mr. Anschutz s qute dfferent from that welded by Mr. Casey, due to the presence and sze of the blocks held by Mr. Allen and Mr. Ludwg. In ths paper, we use Shapley values (Mlnor and Shapley, 1978) to measure the power welded by each blockholder. In the Qwest Communcatons example, the founder s ownershp stake of 45.7% translates nto power of 82.9%, whle the FMR Corp s 6.2% ownershp stake yelds only 0.8% power. Ths reflects the fact that the founder s stake wll, n most stuatons, have the domnant nfluence on the outcome of votng and therefore the nfluence of FMR Corp on the outcome wll be mnmal. In the elnear Inc example, all three blockholders have equal power of 33.3% because any two of them can form a majorty coalton. In ths case, Mr. Casey and Mr. Allen lose from the ownershp structure ther 45% ownershp stakes translate nto only 33.3% power. Mr. Ludwg, the CEO of the frm, on the other hand, s the ganer from ths hs 6% stake translates nto 33.3% power. Fnally, the ownershp structure descrbed n the General Dynamcs example leads to a dstrbuton of power commensurate wth the ownershp stakes held by the blockholders. In partcular, the power n ths example ranges from 5.6% for Delaware Management Holdngs, Inc to 14.2% for the Crown and Goodman famles. To summarze, dependng on the ownershp structure, a partcular ndvdual may have ether larger or smaller 2
power than warranted by her ownershp stake. To dentfy the ganers and losers from the ownershp structure, we ntroduce a new measure of the nfluence of ownershp structure on power. In partcular, for each blockholder n our sample, we calculate a Shapley value, assumng she s the only blockholder n the frm. Ths value, whch we denote as the benchmark Shapley value, descrbes the power a blockholder would have based on just her ownershp stake. The dfference between actual and benchmark Shapley values, whch we refer to as loss of power, measures a blockholder s gan or loss of power due to the presence and ownershp stakes of other blockholders. 3 The earler examples hghlght two aspects of the loss of power we document n the paper. The frst s related to a blockholder s rank (based on the sze of ther ownershp stake). The largest blockholders tend to experence a smaller loss of power, as compared to ther lowerranked counterparts. The rank of shareholders below the largest also has a sgnfcant nfluence on the loss of power. The reason for ths becomes clear when comparng the Qwest Communcatons and elnear examples. The smallest blockholders n both examples hold approxmately equal ownershp stakes n ther respectve frms. Ther power, however, vares sgnfcantly. FMR Corp, the second blockholder n the Qwest Communcatons example, has almost no power, whle the ownershp stake of CEO, the thrd blockholder n the elnear example, becomes pvotal. Ths pattern a sgnfcantly larger loss of power for the second blockholders as compared to ther lower ranked counterparts also holds for our sample frms n general. The second aspect s related to the dentty of the blockholder. 4 Most corporate blockholders tend to hold relatvely small blocks and are usually present n frms that are 3 We chose to use the term loss of power because for most blockholders n our samples the dfference between actual and benchmark Shapley values s negatve. Only about 2% of blockholders gan from other blockholders presence and ther ownershp stakes. 4 Two reasons for the potental dfferences n the loss of power between ndvdual and corporate blockholders are lqudty and dversfcaton consderatons. We wll dscuss these consderatons n detal n Secton 3. 3
characterzed by the absence of an exceptonally large block (e.g., Delaware Management Holdngs n the General Dynamcs example). The power they weld s therefore commensurate wth ther ownershp stake, mplyng a small loss of power. In contrast, ndvdual blockholders have far larger varaton n the sze of ther holdngs, rangng from the 45.7% block owned by Phlp F. Anschutz to the 6% block owned by Jon V. Ludwg. Indvdual blockholders are also more lkely to be present n a varety of ownershp postons n a frm. They can be present as major (domnant) blockholders (lke Mr. Anschutz n the Qwest example), as coequal blockholders (lke Mr. Buffett n the General Dynamcs example), or as mnor blockholders (lke Mr. Ludwg n the elnear example). Ths varaton n ownershp stakes and ownershp structures (e.g., the presence of a large blockholder) results n a larger varaton n the loss of power experenced by the ndvdual blockholders as compared to corporate ones. Once agan, ths pattern s representatve of the broader sample, suggestng that the dentty of the blockholder, corporate or ndvdual, s related to the power they weld. 5 Our paper contrbutes to several streams of lterature. Frst s the lterature on ownershp structure of US frms. 6 Untl recently, the domnant paradgm regardng the ownershp structure of US frms was that majorty of them have dspersed ownershp. Ths paradgm, whch has recently been challenged by Holderness (2009), seems to be an outcome of two facts. Frst, most of the studes on US frms have focused almost exclusvely on the large ndex-lsted frms. It s, therefore, not surprsng that such studes have found very few blockholders n the US frms. Second, the focus of the ownershp structure lterature (and ownershp lterature n general) has been on nsder ownershp. Ths has meant that the man focus has been on ndvdual blockholders and very lttle s known about corporate blockholders. 7 In ths paper, we attempt to 5 Note that our objectve here s not to explan why or how blockholders of a partcular dentty gan or lose power. Our objectve s more modest to dentfy blockholders who gan and lose from the presence and ownershp stakes of other blockholders. 6 See Cheffns and Bank (2009) for an excellent survey of ths lterature. 7 The exstng lterature on the presence (and nfluence) of nsttutonal shareholders has mostly treated them as a unfed block (see, e.g., McConnell and Servaes, 1990; Km and Lu, 2011). 4
remedy these two bases by lookng at two wdely dfferent, hand-collected samples of US frms newly-publc and S&P500-lsted ones and by lookng at all blockholders. 8 Further, snce our samples are hand-collected, they do not suffer from many of the problems documented by Dlugosz, Fahlenbrach, Gompers, and Metrck (2006) that are nherent n the off-the-shelf databases. Another feature of the ownershp structure lterature has been ts focus on the largest (the controllng) shareholder or on the aggregate blockholder (nsder) ownershp. Only recently have researchers started lookng at blockholders beyond the largest and at ther role and mportance n the frm. 9 We contrbute to ths lterature by provdng a detaled descrpton of the number of blockholders as well as ther ownershp stakes and dentty for our two samples of US frms. 10 We also contrbute to the lterature on the dfferences between ownershp and power. A number of studes recognze ths dfference and use Shapley value to capture the votng power of a partcular blockholder (see, e.g., Eckbo and Verma, 1994; Baker and Gompers, 1999). Other studes n fnance use Shapley value as a measure of dsperson between the ownershp stakes of the largest and the second largest blockholders (see, e.g., Laeven and Levne, 2008; Maury and Pajuste, 2005), or as a probablty of a control contest (see, e.g., Nenova, 2003; Zngales, 1994). To our knowledge, ths s the frst paper to explctly study the dfference between ownershp and power. We lnk ths dfference to the ownershp structure and show that t s related to the rank and dentty of the blockholder. The rest of the paper s organzed as follows. Secton 2 descrbes the data used n ths study. Secton 3 provdes the emprcal tests and dscusses the results. Secton 4 concludes. 8 Our approach allows us to dentfy all corporate blockholders, not just the nsttutonal ones found n the Thompson 13F database. 9 Usng European data, Laeven and Levne (2009) show that frms wth a multple blockholders have a hgher value relatve to other frms. Konjn, Kräussl, and Lucas (2011) show that the dsperson of blockholder ownershp stakes has a sgnfcant nfluence on frm value. 10 Dlugosz, Fahlenbrach, Gompers, and Metrck (2006) report both the number of blockholders and ther dentty for ther subsample of Execucomp frms. 5
2. Data and sample selecton 2.1. Sample selecton To provde a comprehensve vew of the ownershp structures of Amercan frms, we use two dfferent samples of publcly-traded US frms the newly publc and the S&P 500-lsted frms. These two samples represent two opposte ends of the spectrum wth the frst representng small and young frms and the second large and mature frms. The sample of newly publc frms s obtaned as follows. We start wth all US IPOs of common equty between 1993 and 1996, obtaned from the SDC/Platnum New Issues database. 11 We elmnate REITs, closed-end funds, unt offerngs, equty carve-outs, fnancal frms (those wth SIC codes between 6000 and 6999), utltes, foregn frms, leveraged buyouts, and roll-ups. We also elmnate frms whch are not found n the Center for Research n Securty Prces (CRSP) or COMPUSTAT databases. Fnally, we remove frms for whch there s a dscrepancy between the frst date of tradng provded by CRSP and SDC. We are left wth a total of 1,448 frms. We then follow these frms for up to 12 years after the IPO or untl delstng, whchever comes frst. Panel A of Table 1 reports the dstrbuton of our newly-publc frm sample by post- IPO year. Of the 1,448 frms at the tme of IPO, 389 survve untl the 12 th lstng annversary. Our total sample conssts of 11,179 frm-year observatons wth avalable ownershp data. Our second sample conssts of frms lsted n the S&P500 ndex. We start wth a lst of S&P500 consttuents as of December 31, 1992. We then elmnate utltes as well as fnancal and foregn frms. Ths leaves us wth a sample of 395 frms, whch we then track for up to 16 years or untl delstng, whchever s earler. Our total sample of S&P500 frms conssts of 4,884 frmyear observatons wth avalable ownershp data. Panel B of Table 1 shows the dstrbuton of these observatons over tme. 11 Our choce of 1993 to 1996 IPOs as the bass of our sample s motvated by two consderatons. Frst, avalablty of pre-1993 IPO prospectuses on Thomson Research, our source of pre-edgar flngs, s lmted. Second, to ensure that we have a suffcently long (post-ipo) tme-seres, we choose to lmt our sample to frms that went publc before 1997. 6
Panel A of Table 2 descrbes characterstcs of our sample frms. In terms of frm sze, our medan newly-publc frm s between 25 th and 50 th percentle of all Compustat- and CRSP-lsted frms. Ths holds true for all three measures of frm sze market captalzaton, total assets, and sales. S&P500 frms, on the other hand, are close to the 95 th percentle. In terms of growth opportuntes (as measured by CapEx/Sales and R&D/Sales), medan frms of both samples fall n the 2 nd quartle. Newly-publc frms are also n the 2 nd quartle based on leverage and asset tangblty, whle the S&P500-lsted ones are n the 3 rd quartle. 2.2. Blockholders and ownershp We defne a blockholder as any entty ownng more than 5% votng rghts as reported n the proxy statements. 12 We classfy each blockholder as ether ndvdual or corporate. We classfy a blockholder as an ndvdual f shares are ether held drectly by her or by an organzaton controlled by her (or members of her famly). All other blockholders are classfed as corporate. For each ndvdual blockholder, we collect data on ownershp stake, nvolvement n the management and governance of the frm, and status as a founder or a member of the foundng famly. We dentfy founders of newly-publc sample frms (and ther famly members) usng nformaton n the management and ownershp sectons of IPO prospectuses and subsequent proxy statements. Founders of the S&P500 sample frms, ther descendants, and famly members are dentfed usng Hoover s Company Profles and company webstes. We treat ownershp stakes held by all famly members as one block. 13 We also further sub-classfy each ndvdual non-famly blockholder based on her nvolvement n the management of the frm. Followng governance lterature, we consder an ndvdual blockholder nvolved (not nvolved) n the management of the frm to be a management (an outsde) blockholder. 12 Securtes and Exchange Commsson (SEC) regulatons requre the dsclosure of ownershp postons of (1) all offcers and drectors and (2) all shareholders holdng more than 5% of any class of shares. 13 Ownershp stakes of famly members are added together even f ther ndvdual ownershp stakes fall below 5% of votng rghts. 7
To classfy corporate blockholders, we frst try to dentfy them n CRSP, Thomson 13F, and VentureXpert databases, or n varous ssues of Pratt s Gude to Venture Captal Resources. If a blockholder could not be found n ether of these sources, we use Factva and general nternet searches by the blockholder s name. Based on the nformaton collected, we classfy corporate blockholders nto the followng categores. A corporate blockholder s classfed as a fnancal nsttuton f t operates n a fnancal ndustry. A corporate blockholder s classfed as a manufacturng corporaton f t belongs to a non-fnancal ndustry. Venture captal or prvate equty blockholders are those who are found n ether VentureXpert database or n Pratt s Gude. Employee stock ownershp plans (ESOPs) are those dentfed as such n the proxy statements. Corporate blockholders that do not belong to any of the groups dscussed above are classfed as other. 14 3. Emprcal tests and results 3.1. Ownershp structure Panel B of Table 2 provdes summary statstcs on the number of blockholders and ther total ownershp n our sample frms. In the newly publc sample, the maxmum number of blockholders s ten, wth the mean (medan) of 2.98 (3). The correspondng number for the S&P500 sample s nne, wth the mean (medan) of 1.90 (2). The mean (medan) total blockholder ownershp n the newly publc sample s 43.45% (43.2%), whle n the S&P500 sample t s 20.24% (17.55%). These percentages are smlar to those reported n pror studes. For example, the total blockholder ownershp n our newly-publc frm sample s smlar to that reported by Holderness (2009) n hs study of a random sample of publcly traded US frms. A smlar blockholder ownershp for the ndex-lsted frms has been reported by, among others, Dlugosz, Fahlenbrach, Gompers, and Metrck (2006). In Panel C of Table 2, we report summary statstcs at the frm-year-blockholder level. In 14 Ths category represents 4.55% (4.57%) of corporate blockholders n the newly-publc (S&P500) sample. 8
the newly-publc sample, about 39% (61%) of all blockholders are ndvduals (corporatons) who own, on average, 20.1% (10.9%) of the frm. Medan ownershp stakes of the ndvdual and corporate blockholders are 12.4% and 8.2%, respectvely. In the S&P500 sample, by contrast, almost 15% (85%) of the blockholders are ndvduals (corporatons) who own, on average, 21.5% (9%) of the frm. Medan ownershp stakes of the ndvdual and corporate blockholders are 13.1% and 7.6%, respectvely. Overall, two man patterns emerge from Table 2. Frst, as far as the number of blockholders s concerned, ndvdual blockholders tend to domnate n the newly-publc frms, whle corporate blockholders tend to domnate n the S&P500-lsted frms. Further, f ndvdual blockholders are present, they tend to have larger ownershp stakes as compared to corporate blockholders. Ths s true for both samples. It should, however, be noted that n an average S&P500 frm, ndvdual blockholders hold markedly lower ownershp stakes as compared to corporate blockholders. In other words, t s only condtonal on ndvdual blockholder presence that they own a larger ownershp stake. In Table 3 we descrbe the ownershp structure of the newly publc and S&P500-lsted frms along two dmensons the number of blockholders and the sze of ownershp stakes of varous blockholders. Panel A (B) descrbes ownershp structure of newly-publc (S&P500) frms. As can be seen from the second columns of both panels of Table 3, blockholders are far less prevalent n the S&P500 frms. In the newly-publc sample, 2.3% of frm-years do not have any blockholder, whle the same s true for as many as 19% of S&P500 frms. Further, there s a sgnfcant varaton n the number of blockholders n each sample of frms. Frms wth more than three blockholders account for around a thrd of newly-publc frms n our sample, but only for about an eghth of S&P500 sample frms. The largest blockholder, f present, controls, on average, 26% (15%) of the votes n a newly-publc (S&P500) frm. Not surprsngly, the ownershp stake of the largest blockholder declnes wth the presence of addtonal blockholders. Ths declne, however, s more pronounced 9
for the newly-publc frms. For the S&P500 frms, the ownershp stake of the largest blockholder remans remarkably stable for frms wth three or more blockholders. Such a stablty of the ownershp stakes s also present for blockholders other than the largest. In partcular, ther ownershp stakes have a tendency to ncrease wth the number of blockholders present n the frm. For example, the average ownershp of the blockholders ranked thrd ncreases from 7.4% to 9.1% n the newly publc sample and from 6.4 to 8.7% n the S&P500 sample. There s also a sgnfcant degree of varaton n the ownershp stakes of blockholders even when keepng the number of blockholders constant. For example, the sze of the second blockholder s ownershp stake n the newly-publc frms wth two blockholders ranges from 5% to 49.2%. The correspondng range for the S&P500 frms s 5% to 27.3%. A smlar varaton s present n frms wth more than two blockholders, but the range s smaller. As alluded to n the ntroducton, varous blockholders are lkely to have dfferent preferences, whch may lead them to choose dfferent ownershp stakes and dfferent ownershp structures. Ths suggests that the dentty of a blockholder mght be another mportant dmenson of ownershp structure. We descrbe the dentty of blockholders n Table 4. In Panel A, we descrbe the dentty of blockholders n the newly publc frms. Almost a half of all ndvdual blockholders n the newly publc sample are foundng famles, whle the remander are managers and outsders n almost equal proportons. A majorty of the ndvdual blockholders hold ownershp stakes between 5% and 15%, wth the excepton of foundng famles who are also present n sgnfcant numbers n hgher ownershp brackets. The domnant types of corporate blockholders n the newly publc frms are fnancal nsttutons (62.2%), venture captalsts (24.1%), and manufacturng frms (8.8%). A strkng dfference between the three types of blockholders emerges when comparng ther ownershp stakes. In partcular, fnancal nsttutons rarely hold ownershp stakes above 25%, whle manufacturng frms and venture captalsts do hold stakes n ths range. As can be seen from Panel B of Table 4, famles represent 67.8% of all ndvdual 10
blockholders n the S&P500 frms, whle outsders account for 23.9%. Managers, on the other hand, are rarely present as blockholders n the S&P500 frms they represent only 8.3% of all ndvdual blockholders. The dstrbuton of ownershp stakes held by varous blockholders s smlar to that observed for the newly publc frms famles are present n all ownershp brackets whle the ownershp stakes of managers and outsders are rarely above 25%. The domnant types of corporate blockholders n the S&P500 frms are fnancal nsttutons (86.6%) and ESOPs (7%). Whle the ownershp stakes of fnancal nsttutons n the S&P500 frms are, as n the case of newly publc frms, mostly below 15%, a szable fracton of ESOPs hold shares above ths level. Overall, three man conclusons emerge from the above dscusson. Frst, there s a large varaton n the number of blockholders n both samples. Second, there s a large varaton n the ownershp stake of blockholders even after controllng for the number of blockholders. Thrd, we fnd a sgnfcant varaton n the dentty of ndvdual blockholders, both across the ownershp brackets as well as across the two samples. 3.2. Shapley value Our fndngs of a sgnfcant varaton n the number of blockholders and the sze of ther ownershp stakes descrbed above suggest that the ownershp stake of a partcular blockholder may not be a good measure of the actual power she has n the frm. Obvously, the extent of a blockholder s nfluence n a frm s hardly observable. To formally capture ths nfluence, we need a measure that captures two factors: (1) the sze of the blockholder s ownershp stake, and (2) the presence and sze of other blockholders ownershp stakes. Shapley and Shubk (1954) provdes such an a pror measure of power for each blockholder n a decson makng body. In ths paper, we use the oceanc formulaton of Shapley value developed by Mlnor and Shapley (1978). (For a detaled dscusson on the calculaton of Shapley values please refer to Appendx B.) 11
Shapley value calculaton transforms the votng rghts of a player nto the capacty of that partcular player to change the outcome of a votng sesson. In other words, the power of a partcular player s defned as the percentage of tmes she casts the decsve vote. The oceanc formulaton of Shapley value used n ths paper also allows us to account for the wdely-held porton of the votng rghts. For example, a 10% blockholder has a Shapley value of 11.1% when the other 90% of votng rghts are wdely-held. The same 10% blockholder has Shapley value of 33.3% when there are two other blockholders wth 45% stakes each. 3.3. Shapley value and ownershp We now analyze the relatonshp between Shapley value and blockholder ownershp. Table 5 reports the Shapley value for blockholders n both samples controllng for the level of ownershp. In the newly-publc sample, the mnmum Shapley value for ownershp levels of less than 40% s zero whle the maxmum Shapley value starts from 33% and after a small declne moves up to 66%. Small Shapley values are for mnorty blockholders n the presence of a very large (majorty) blockholder, smlar to the Qwest Communcatons Inc example. Maxmum Shapley values at small ownershp levels are mnorty blockholders that become pvotal between two large blockholders, smlar to the elnear Inc example. The range of Shapley values for a partcular level of ownershp s ncreasng, up to ownershp levels close to 50%. In partcular, for our sample frms an ownershp level of 5% mples possble Shapley values between zero and 33%. Note that the nonlnear relatonshp between ownershp and Shapley value s frst exponental (for ownershp stakes of less than 50%) and then becomes a flat lne at 100%, snce a blockholder wth more than 50% ownershp stake has complete control regardless of her exact ownershp stake (.e., such blockholders have Shapley value equal to one). Ths nonlnear relatonshp s llustrated n Fgure 1. Examnaton of the S&P500 sample reveals a smlar pattern, whch s llustrated n Fgure 2. The relatonshp between Shapley value and ownershp stake reported n Table 5 s 12
consstent wth our ntal conjecture that varaton n the ownershp structure leads to a sgnfcant varaton n the power of a partcular blockholder, even when controllng for her level of ownershp. In other words, there are blockholders who have power hgher than that warranted by the sze of ther ownershp stake and there are blockholders who have sgnfcantly less power than warranted by ther ownershp stake. Ths leads us to the queston we address n the remander of ths secton who gans and who loses from the ownershp structure? To answer ths queston, we need a measure that captures the nfluence of the ownershp structure on a blockholder s power. We develop such a measure n the next subsecton. 3.4. Benchmark Shapley value, ownershp, and loss of power As descrbed above, we measure the loss of power (LP) as the dfference between actual and benchmark Shapley values. Before proceedng, we would lke to note two ssues concernng our measure of the loss of power. Frst, the magntude of the loss of power depends upon the level of the blockholder s ownershp. By constructon, the maxmum loss of power at a partcular level of ownershp s equal to the benchmark Shapley value at that level. Ths mples that the maxmum loss of power s ncreasng wth the level of ownershp. To reflect ths dependency, we control for the level of blockholder s ownershp n all of the subsequent tests. Second, also by constructon, the loss of power for frms wth only one blockholder s zero. Ths mples that ncluson of frms wth a lone blockholder would bas downward our estmates of the loss of power. Therefore, from now on we wll focus only on frms wth at least two blockholders (.e., the frms wth non-zero loss of power). Panels A and B of Table 6 summarzes the loss of power for the newly-publc and S&P500 samples, respectvely. 15 Several patterns emerge from Table 6. Frst, both the mean and the medan LP are negatve for all levels of ownershp suggestng that most blockholders lose 15 For the sake of brevty, from now on we wll report all the unvarate tests usng fve dfferent ownershp brackets. The results are qualtatvely unchanged when we splt the ownershp nto the 18 dfferent brackets used n Table 5. 13
power due to the presence and the sze of ownershp stakes of other blockholders. Ths s not surprsng snce we have defned our benchmark based on the absence of addtonal blockholders, whch ntutvely translates nto less competton and thus greater power for the blockholder n queston. Second, both the mean and the medan loss of power are statstcally sgnfcantly dfferent from zero for both samples for all ownershp brackets. Thrd, the loss of power accounts for approxmately 13.2% (4.8%) of the benchmark Shapley value for the newly publc (S&P500) frms. Ths mples that, on average, the presence and ownershp stakes of other blockholders reduce a blockholder s potental power by ths percentage. Fourth, LP s decreasng untl ownershp reaches 50%. 16 Ffth, blockholders who gan from ownershp structure (.e., those wth postve LP) are those that own between 5% and 25% of a frm. Beyond 25% ownershp the maxmum LP s zero, ndcatng that none of blockholders gans from ownershp structure after ths level of ownershp. Sxth, a comparson of loss of power between the two samples reveals that blockholders n the S&P500 frms lose less power as compared to ther newly-publc counterparts. In unreported tests, we fnd that the mean and medan loss of power n the newlypublc frms s statstcally sgnfcantly greater than that n ther S&P500-lsted counterparts for all ownershp brackets. Ths mght be due to the smaller number and total ownershp of blockholders n the S&P500 frms. 3.5. Loss of power and rank In ths secton, we examne the nfluence of the blockholder s rank on her loss of power. We start by examnng ths nfluence n a unvarate settng. For the sake of brevty, we combne thrd largest blockholders and those ranked below nto a sngle group. The results of the tests of dfferences n the loss of power for blockholders of dfferent ranks are provded n Table 7. The results for the newly publc frms, reported n Panel A, suggests that second blockholders 16 Note that, by constructon, loss of power s zero for any ownershp stake above 50% because such blockholders always have a Shapley value of one and the presence of addtonal blockholders has no nfluence on ther power. 14
experence a sgnfcantly hgher loss of power, compared to both the frst as well as the lowerranked blockholders. The average dfference n the loss of power between the frst and second blockholders ranges from 1.7% for the blockholders n the 5% to 15% ownershp bracket to 33% n the 35% to 50% bracket. All dfferences are statstcally sgnfcant at the 1% level. We also fnd that blockholders ranked thrd and below experence a larger loss of power relatve to the frst blockholders, but smaller relatve to the second blockholders. Agan, all dfferences are statstcally sgnfcant at the 1% level. 17 Smlar patterns also hold for the S&P500 frms (see Panel B of Table 7). We now examne the nfluence of a blockholder s rank on her loss of power n a multvarate settng. In partcular, we estmate the followng regresson equaton: Loss of power Second Thrd * Own5to25 Own5to25 * Second 0 Own5to25 3 Own25to50 6 1 2 * Thrd * Thrd * Own25to50 4 1 Own25to50 5 2 * Second (1) Followng Morck, Shlefer, and Vshny (1998), we use a breakpont at 25% ownershp. 18 Own5to25 s equal to the blockholder ownershp f the ownershp s below 25% or equal to 25% f the ownershp s above 25%. Own25to50 s equal to zero f the ownershp s below 25%, equal to ownershp mnus 25% f the ownershp s between 25% and 50%, or equal to 50% f the ownershp s above 50%. As dscussed earler, loss of power for blockholders wth ownershp stakes above 50% s, by defnton, zero. Thus, for ths ownershp range, LP does not vary wth ownershp and therefore, for all subsequent tests, we wll use only observatons wth ownershp less than 50%. As before, we also exclude all observatons for whch the loss of power s zero (.e., frm-years wth only one blockholder). We use two rank-related varables. Second s a dummy varable that takes on a value of one f the blockholder s ranked second n a partcular 17 The sgnfcantly greater loss of power experenced by the second blockholders means that they lose more of ther potental power. If an average largest blockholder loses 5.2% of her benchmark Shapley value, the second blockholders, on average, lose 23% of ther potental power (results not reported). Blockholders ranked thrd and below lose, on average, 12.1% of ther potental power. 18 We have also used breakponts at 20%, 30%, and 35% ownershp stakes. The results are qualtatvely unchanged n these alternatve specfcatons. 15
frm-year, and zero otherwse. Lkewse, Thrd s a dummy that takes on a value of one f the blockholder s ranked below the second n a partcular frm-year, and zero otherwse. If, as predcted, second blockholders are assocated wth a larger loss of power, we would expect the coeffcent estmates of Own5to25*Second and Own25to50*Second to be negatve. The results of the estmaton of Eq. (1) are reported n columns (1) of Panels A and B of Table 8 for the newly-publc and S&P500 frms, respectvely. For the largest blockholder, consstent wth the results of the unvarate tests reported n Table 6, we fnd a negatve relatonshp between the ownershp stake of a blockholder and her loss of power. The coeffcent estmates of Own5to25 and Own25to50 are negatve and statstcally sgnfcant for both samples. The magntude of the coeffcent estmates of Own25to50 s smaller than that of Own5to25 suggestng a non-lnear relatonshp between the ownershp and loss of power. Ths negatve relatonshp between the loss of power and a blockholder s ownershp stake s even more pronounced for the second-largest blockholders. In partcular, we fnd that the coeffcent estmates of Own5to25*Second and Own25to50*Second are negatve and statstcally sgnfcant for both samples. Overall, our results suggest that the second blockholders ndeed lose sgnfcantly more than do the largest. Dfferences between mean and medan loss of power reported n Table 6 mples that the dstrbuton of LP s skewed. Ths suggests a possblty that our results may be drven by outlers. To address ths potental concern, we exclude observatons for whch Shapley value s zero. Snce, by constructon, these are the observatons that have the hghest loss of power for each ownershp range, by excludng them we are removng some of the extreme observatons. We reestmate Eq. (1) usng ths reduced sample. The results are reported n columns (2) of both panels of Table 8 for the newly-publc and S&P500 frms. The results are qualtatvely smlar, but the adjusted R-squares are hgher than those reported n columns (1) of Panels A and B of Table 8. It can be argued that our results mght be nfluenced by the followng two bases. Frst, snce frms wth relatvely more blockholders are over-represented n our dataset, they may 16
unduly nfluence our results. Second, due to the panel nature of our dataset, t s lkely that a certan degree of autocorrelaton exsts between multple observatons of the same blockholder over dfferent years. Ths, n turn, may lead to nflated t-statstcs. We address these potental concerns by clusterng standard errors at the frm level, as suggested by Petersen (2008). Columns (3) of Panels A and B of Table 8 report the coeffcent estmates and the adjusted t-statstcs. As expected, the adjustment reduces the sgnfcance of some of the coeffcent estmates but does not qualtatvely change our results. So far we have focused only on the nfluence of ownershp and dentty on the loss of power. It s possble, however, that frm-specfc characterstcs, such as frm sze, leverage, and asset tangblty, are also related to ownershp structure. For example, large frms are less lkely to have large blockholders, ceters parbus. Frms wth more tangble assets may fnd t easer to fund the new projects usng debt rather than equty (Myers, 1977). Hgher extent of debt fnancng wll lead to a lower dluton and therefore larger ownershp stakes n such a frm. Such dfferences n the ownershp structure, n turn, can nfluence the loss of power. In columns (4) of Panels A and B of Table 8, we report the results of the re-estmaton of Eq. (1) wth frm-specfc control varables. Overall, the ncluson of the frm-specfc varables does not qualtatvely change ether the sgnfcance or the magntude of the estmated coeffcents of nterest. Fnally, our man results presented so far have been based on a pecewse lnear OLS specfcaton. We have re-estmated Eq. (1) usng a quadratc specfcaton. The results are reported n columns (5) of Panels A and B of Table 8 for the newly-publc and S&P500 samples, respectvely. Our conclusons reman qualtatvely unchanged n ths alternatve specfcaton. In partcular, we fnd that the second blockholders lose more power, as compared to the largest ones, for almost the entre ownershp range. 19 19 Note that the nflecton ponts mpled by the results reported n columns (1) and (2) of Panel A of Table 11 are 9.7% and 7%, respectvely. 17
3.6. Loss of power and dentty The dentty of a blockholder can also have a sgnfcant nfluence on the loss of power. In partcular, there are two mportant dmensons along whch ndvdual and corporate blockholders are lkely to be dfferent when t comes to the senstvty to the loss of power. The frst of these s related to portfolo dversfcaton. A majorty of corporate blockholders are subject to a lmt on how much of a frm s equty they can own. 20 As a result, they are effectvely lmted n ther ablty to hold an undversfed portfolo. Indvdual blockholders are, n general, not subject to such restrctons and therefore able to trade-off any potental costs arsng from an undversfed portfolo wth any benefts accrung from hgher power (.e. lower loss of power). To put t dfferently, due to the exstence of ths trade-off, ndvdual nvestors are lkely to be more senstve to a loss of power as compared to corporate blockholders. Ths mples that ndvdual blockholders wll have a smaller loss of power, relatve to corporate blockholders. The second dmenson pertans to the lqudty of the portfolo frm s stock. Corporate blockholders are more lkely to have a short-term focus relatve to ndvdual blockholders. 21 Ths mples that corporate blockholders are more senstve to the costs assocated wth an llqud block (see Bode, Kane, and Marcus, 2010). Longer holdng perods of ndvdual blockholders, on the other hand, make them less senstve to the llqudty. Snce the presence of a large blockholder mpedes lqudty of a frm s stock (see, e.g., Brockman, Chung, and Yan, 2009), corporate blockholders are less lkely to acqure equty stakes n such frms. By defnton, an ncrease n the ownershp stake of the largest blockholder results n lower power of all other blockholders. Therefore, a smaller sze of the largest block, ceters parbus, mples a lower loss 20 There are external lmts to the percentage of a portfolo company s shares certan corporate blockholders can own. For example, the prudent man rule (or ts more modern form, the prudent nvestor rule) as mplemented n the Employee Retrement Income Securty Act of 1974 requres penson plans to dversfy ther assets. As specfed n the Investment Company Act of 1940, n order to be consdered dversfed, at least three-fourths of a corporate blockholder s portfolo must be nvested such that he does not own more than 10% of the securtes of a partcular frm. 21 Ths has been suggested by, among others, Graves and Waddock (1990) and Coffee (1991). We confrm ths to be the case for our sample frms. In partcular, holdng perod for an average ndvdual blockholder n our sample s 6.5 years, whle for corporate blockholders t s only 2.2 years. 18
of power for corporate blockholders. Ths suggests that due to lqudty consderatons corporate blockholders wll have a smaller loss of power, relatve to ndvdual blockholders. The relatve mportance of the dversfcaton and lqudty effects over varous levels of blockholder ownershp s an emprcal matter. We are not aware of any study, ether theoretcal or emprcal, that has examned the relatonshp between blockholder dentty and the loss of power. Our am here s to provde prelmnary evdence on ths relatonshp. In Table 9, we examne the dfferences n the loss of power between ndvdual and corporate blockholders n a unvarate settng. The results for the newly publc frms, reported n Panel A, suggests that for ownershp stakes below 35%, the ndvdual blockholders experence a sgnfcantly larger loss of power as compared to the corporate ones. The mean and medan dfferences are statstcally sgnfcant at the 1% level for all but one test. The smaller loss of power experenced by the corporate blockholders n ths ownershp range s consstent wth the noton that such blockholders, for dversfcaton and lqudty reasons dscussed above, tend to hold small stakes and avod frms wth a large ndvdual blockholder. For ownershp stakes above 35%, however, corporate blockholders experence a sgnfcantly larger loss of power. The results for the S&P500 frms, reported n Panel B of Table 9, are qualtatvely smlar, but the small sample szes for corporate blockholders wth ownershp stakes above 25% make the results less relable. In ths ownershp range our fndngs are consstent wth the need for hgher power as a compensaton for the hgher costs arsng from an ndvdual blockholder s undversfed portfolo. 22 We now examne the dfferences n the loss of power between ndvdual and corporate blockholders usng the followng regressons specfcaton: 22 Note also that, as reported n Table 4, the dentty of corporate blockholders wth the ntermedate levels of ownershp s sgnfcantly dfferent from that of blockholders wth low levels of ownershp. In partcular, there are very few fnancal nsttutons wth ntermedate levels of ownershp. The motvaton of, for example, manufacturng corporatons s lkely to be dfferent from that of fnancal nsttutons. Manufacturng corporatons may acqure a block n a frm to secure more favorable transfer prcng or to ensure access to a new technology t needs, whle a fnancal corporaton s unlkely to have such nterests. 19
Loss of power * Identty * Own5to25 * Own25to50 3 0 1 * Own25to50 4 1 * Own5to25 2 * Identty * Identty (2) The results of the estmaton of Eq. (2) are reported n columns (1) and (8) of Panel A of Table 10 for the newly-publc and S&P500 frms, respectvely. We fnd that the coeffcent estmates of Own5to25*ID are negatve and statstcally sgnfcant for both samples. Ths suggests that, for a gven level of ownershp, ndvdual blockholders lose more power as compared to corporate blockholders. The coeffcent estmate of Own25to50*ID, however, s postve and statstcally sgnfcant for both samples. Ths suggests that, at ntermedate levels of ownershp, ndvdual blockholders tend to lose less power relatve to corporate blockholders. We further examne f our conclusons regardng the nfluence of a blockholder s dentty on her loss of power hold for varous types of ndvdual and corporate blockholders. We frst compare the relatonshp between ownershp and loss of power for each type of ndvdual blockholder (famly, managers, and outsders) wth that for all corporate blockholders. The results of these comparsons are reported n columns (2) to (4) and (9) to (11) of Panel A of Table 10 for the newly publc and S&P500 samples, respectvely. 23 We fnd that all coeffcent estmates of Own5to25*ID are postve and statstcally sgnfcant, except for outsders n the S&P500 sample (column (11)). The coeffcent estmates of Own25to50*ID are all postve and sgnfcant, expect for managers n the newly publc frms. Overall, the results for dfferent types of ndvdual blockholders are mostly consstent wth those reported n columns (1) and (8) of Panel A. We now compare the relatonshp between ownershp and the loss of power for each type of corporate blockholder (fnancal nsttutons, manufacturng frms, prvate equty frms (n the newly publc sample), and ESOPs (n the S&P500 sample)) wth that for all ndvdual blockholders. The results are reported n columns (5) to (7) and (12) to (14) of Panel A of Table 10 for the newly publc and S&P500 samples, respectvely. We fnd that all coeffcent estmates 23 We do not nterpret the coeffcent estmates that have been estmated from fewer than 30 observatons (as dsclosed n Table 4). 20
of Own5to25*ID are postve and statstcally sgnfcant. The coeffcent estmates of Own25to50*ID for manufacturng and prvate equty frms n the newly publc sample are both negatve, but t s sgnfcant only for the former. Overall, the results are generally consstent across dfferent types of corporate blockholders. Overall, we fnd that a blockholder s dentty has a sgnfcant nfluence on the relatonshp between her ownershp stake and the loss of power, wth ndvdual (corporate) blockholders losng more power at low (ntermedate) levels of ownershp. These general patterns also hold for most types of ndvdual and corporate blockholders. Whle there appear to be dfferences between types of blockholders, examnaton of ther sgnfcance and the underlyng reasons behnd them are beyond the scope of the paper. As before, we also test the robustness of our results to the excluson of observatons wth zero Shapley values, to clusterng of observatons, to addtonal frm-specfc control varables, and to the use of a quadratc specfcaton. 24 The results of these tests, reported n Panel B of Table 10, are qualtatvely smlar to those reported n Panel A of Table 10. 4. Dscusson and conclusons Although blockholder ownershp has been consdered an mportant element of corporate governance, very few researchers have drectly examned the prevalence and mplcatons of blockholder presence n US frms. In ths paper, we start by showng that US frms have a wde spectrum of ownershp structures from frms wth no blockholders to frms wth ten blockholders and from frms wth total blockholder ownershp of 5% to 99.7%. We then go beyond lookng at the ownershp stake of blockholders and specfcally address the dfference between ownershp and power. In partcular, we show that the above varaton n the ownershp structure leads to a large varaton n the power a partcular blockholder has n the frm. For 24 For the sake of brevty, we report only the results of robustness tests based on the specfcatons reported n columns (1) and (8) of Panel A of Table 10. The results of other specfcatons are smlar and are avalable from the authors upon request. 21
example, a 5% blockholder can have a power anywhere between zero and 33%, dependng on the presence and ownershp of other blockholders n the frm. We then develop a measure of the nfluence the ownershp structure has on a blockholder s power and show that an average blockholder loses up to 12.5% of hs potental power due to the presence and ownershp stakes of other blockholders. Fnally, we show that the loss of power vares systematcally wth two observable blockholder characterstcs rank and dentty. In partcular, we dentfy groups of blockholders that are more lkely to lose power, such as second blockholders and non-famly managers. Our paper has several mportant mplcatons for the feld of corporate governance. Frst, the sgnfcant loss of power documented n ths paper suggests a need to look beyond the ownershp stakes of varous blockholders (or groups thereof). Ths s especally mportant as a large body of research n fnance has tended to vew ownershp and power as synonymous. For example, a central ssue n the extensve lterature on the relatonshp between ownershp and frm value s that of entrenchment the pont at whch a blockholder gans suffcent power to be able to extract rents or otherwse exproprate mnorty shareholders. Intutvely, entrenchment depends on power of whch, as we have shown, ownershp s but an mperfect proxy. Second, our fndngs provde future researchers wth a better dea of the lmtatons of the assumpton that ownershp s equal to power. In partcular, t suggests specfc cases when the dfference between ownershp and power s lkely to be especally pronounced. Ths dfference, and therefore, the need to control for t, wll be more pronounced for studes lookng at the entrenchment of a sngle blockholder (e.g., a frm s CEO as opposed to a group of blockholders, such as frm nsders), especally f the blockholder s not the largest one n the frm and s not a founder or a member of foundng famly. Further, the need to dstngush between ownershp and power s lkely to be more mportant for studes that use ether a random sample or that of smaller and younger frms. Thrd, our fndngs may provde a better understandng of the drvng forces behnd the 22