Centre for Corporate Governance Research
The CCGR aims to produce high-quality research on how ownership and governance of firms impact value-creation and the welfare of firms’ stakeholders.
The CCGR aims to produce high-quality research on how ownership and governance of firms impact value-creation and the welfare of firms’ stakeholders.
One of the economic areas, of any country, most affected by the emergence of Covid-19 is small/medium-sized and family firms. We exploit this exogenous negative shock and the very detailed data on Norwegian firms to address two questions.
The first question is whether family firms are more resilient to negative shocks (such as the CoVID-19 crisis) than non-family firms. On the one hand family owners can be extremely committed to the firm and, therefore, might be willing to support the family business over and beyond the level of support that would be provided by non-family owners. On the other hand, family owners might be averse to open the ownership structure of a firm to outsiders possibly undermining its resilience to negative shocks. The analysis of this question is supported by detailed Norwegian data on firms, their owners and family relationships between them.
The second question is whether family firms display stronger social responsibility than non-family firms. We address this question by studying if and to what extent social pressure can push family firms to give up financial support offered by society (in the form of state aid) at no cost.
This project uses Norwegian trading and bankruptcy data to study the impact of common debt ownership on restructuring outcomes. The success or failure of the restructuring proposal depends on the negotiations between different creditors with conflicting interests. When creditors have overlapping debt portfolios in other firms, restructuring processes are likely to be different due to network effects and coordination effects. The main contribution of our project is to understand the inter-creditor conflicts, their behaviour as a group, and the impact on the restructuring negotiations.
Our proposal builds a working theory on conflicts in family firms, develops six testable implications, and tests them on a Norwegian registry data covering the population of economically active private firm owner families over almost 20 years with wealth, income, demographic, location, family relationship, and accounting data.
We hope that the paper will further understanding of governance mechanisms in private firms by linking group dynamics inside families to family member ownership-related activities inside firms. This insight benefits practitioners setting up firms or thinking about succession, economists studying private firm governance, but also policymakers considering what policies affect the generational transition and the survival of private firms, which constitute arguably the most important firm type in the economy.
A large fraction of businesses throughout the world are organized around families and numerous studies have focused on the effect of family ownership and control on Tobin’s q, accounting measures of firm value, or stock returns (Claessens et al, 2002; Anderson and Reeb, 2003; Cronqvist and Nilsson, 2003; Villalonga and Amit, 2006; Perez-Gonzalez, 2006; and Bennedsen et al, 2007). Moreover, many of these papers have focused on the role of executives and change in executive ownership. We take an alternative view and examine how firm ownership structure can act through the labor market of non-executive employees to affect firm performance through wages and human capital development.
We hypothesize a model where a family firm faces tradeoffs between the ability to commit to long-term implicit contracts regarding employment and training against incentives to invest in projects that provide private benefits only to the owners. The resulting equilibrium affects the relative wages of family firm workers and their relative productivity (both in the short and long term), as well as the relative performance of family firms.
We intend to examine the effect of family firm ownership and control on the labor market using Norwegian micro-data on worker wages, firm accounting information, and firm ownership structure. Using this data, we plan to test our hypotheses to determine the effect of family firm ownership on the labor market, with a specific focus on non-executive employees. The advantage of this data is that we have a detailed and longitudinal panel of both workers and firms, including their ownership, allowing us to separate the different explanations. The main contribution of this paper will be to establish the effect that family ownership has on the labor market and human capital development.
Family firms represent an important part of any country’s economy, in terms of employment, revenues, and value creation (Bennedsen, Perez-Gonzalez, and Wolfenzon 2010, Berzins, Bøhren, and Stacescu 2018). However, there are few large-scale studies of family firms, given that the vast majority of family firms are nonlisted, and that information on family relationships between owners is difficult to come by. Our project aims to fill this gap.
Family firms have a particularly close relationship between the company and its owners. The resources available to the family, its human and financial capital, are likely to have a strong influence on the firm’s performance. The project will examine the link between the resources available to the family and the family firm’s behaviour and performance.
Family relationships can create networks of linkages between firms controlled by family members. The project will examine the importance of these linkages in transmitting economic shocks, and in sharing financial resources and business skills.
Finally, the project will explore the relationships between family firms and banks, in particular the decisions made by firms and banks in establishing their initial lending relationship.
This project studies the effect of executive compensation on market-based assets. Does the long-term equity incentive in executive compensation increase market-based assets? Are market-based assets positively related to the use of certain non-financial performance criteria in executive compensation and negatively related to the use of short-term accounting measures as criteria?
Do managers' behavioral biases influence corporate outcomes? We use a large sample of CEOs and firms, combined with measures of a number of behavioral biases, to study the impact of managerial biases on corporate performance and policies.
This project uses Norwegian registry data to study the interdependence between entrepreneurs' portfolios and the capital structure decisions of the firms they own. Do more wealthy owners have firms with higher leverage? Do more diversified owners have firms with higher leverage? Do these relations depend on the concentration of ownership? Are they different in owner-managed firms or family firms?
The literature has demonstrated the importance of ownership identity and structure for firms’ strategies, behavior and performance. In this project, we consider the comparatively little studied specific effects of ownership on important strategic decisions related to internationalization. Focusing on Norwegian companies, we will link detailed ownership and accounting data from the CCGR database with firm-level data on foreign direct investment and trade from Statistics Norway (2000-2013).
The level of detail offered by these two data sources will allow us to explore such issues as the effects of various types of ownership (ranging from state ownership to family ownership) on companies’ ability to increase economic performance through internationalization (“learning by internationalizing”). We treat ownership as a moderating effect between internationalization and performance. The moderation hypotheses are captured through an interaction set-up where a positive (negative) coefficient for the interaction term implies that the type of ownership in question has a positive (negative) effect on the ability of a firm to reap benefits from internationalization.
This project attempts to answer to what extend firm policies are affected by CEOs’ personal attitudes towards risk. Specifically, we will examine the relation between CEOs’ personal decision and their corporate policies.
The various versions of the market efficiency hypothesis state that security prices reflect available information. This view is consistent with a mechanism where information is processed by traders and that their trading activities in turn embed this information into prices. The traditional view is that the process through which prices gets informative ends here. A recent literature has investigated the possibility that corporate managers pay attention to stock prices and adjust their corporate decision in accordance with what they learn.
When managerial decisions is affected by prices, there will be a feedback loop between prices and decisions that may impact the degree of market efficiency. Edmans, Goldstein, and Jiang (2011) argue that feedback between prices and decisions may deter speculators from trading on private information. In a merger setting, the intuition for their argument is simple. If speculators have negative information about a potential merger transaction, they will short the buyer. But, if the managers of the buyer listen to the market, they will realize that the deal is bad and cancel the transaction. This leaves the speculators with a loosing short position. Thus, the speculators will be reluctant to short the stock in the first place. The outcome is that bidder price does not reflect as much negative information as is available to speculators. In other words, markets are not informationally efficient.
The main contribution of the proposed research is to provide empirical evidence on the existence of the feedback mechanism studied in Edmans, Goldstein, and Jiang (2011). Using a sample of merger announcements, we plan to compare the information content of post announcement stock prices for bidders committed to pay an termination fee with the corresponding measure for bidders without such commitment. Bidders for which it is more costly to cancel the transaction is less likely to cancel. Consequently, speculators are more likely to trade on their negative information and prices should be more informative.
The Norwegian tax reform of 2006 has significantly increased the taxation of capital income, including dividends. Our project examines the implications of the tax reform on payout policy and agency conflicts within the firm. The higher incentives for retaining cash within the firm may have exacerbated agency issues. At the same time, a transition rule making it easier to transfer shares between firms may have interacted with these agency concerns.
Key questions: Is there an interaction between dividend taxation and agency concerns within the firm? Is the reaction to the tax reform related to firm's ownership and control structures? Do shell (investment) companies play a role in separating tax and agency concerns?
Our project addresses the role of dividends as a liquidity provider for the firm’s owners. By accounting for a dividend determinant that has so far been largely ignored in the literature, our ambition is to bring new insight which contributes to solving the very persistent dividend puzzle. Our tools for achieving this goal are detailed ownership data for private firms, wealth data for individual owners reflecting their degree of illiquidity, and structural shifts in the taxation of dividends and personal wealth, which create exogenous shocks to owner illiquidity.
Our key to uncovering the relationship between owner illiquidity and firm payout is the wealth tax levied on the owner’s stock, i.e., the owner’s share of the firm’s equity. This tax bill needs to be financed by the owner’s liquid assets, which may be difficult when the tax bill is high relative to the owner’s liquid assets and personal equity. Our basic idea is that the higher this ratio of wealth tax to owner assets or owner equity, the more the owner wants the firm to pay high dividends. We expect this illiquidity-induced dividend effect to be particularly strong in firms controlled by families who have invested heavily in firms where the family’s share of the firm’s equity is large relative to the family’s liquid assets and personal equity.
The main goal of this project is to develop a framework for board evaluation to be used by Norwegian companies, both listed and unlisted. The project build on findings in PhD thesis of Janicke Rasmussen (2010) concluding that the board evaluation process implemented in Norwegian listed companies does not contribute to enhanced corporate governance (through increased board effectiveness). The main reason is that the implemented process is not designed to meet the overall purpose of board evaluation, i.e., to assess actual performance against expected performance. I.e. there is no fit between the system and purpose of board evaluation.
The research will be developed through three sub-projects. The goal of the first research paper is to further develop the concept of board evaluation by exploring the different purposes of board evaluation from an external and internal perspective, and linking it to corporate governance theories. From this, testable hypothesis will be developed which will be used in sub-project two and three. The findings of these projects will be used to develop a framework of board evaluation which, if implemented, may contribute to increased board effectiveness.
To what extent does operating flexibility vary with a firm's size? Does operational flexibility matter more during economic downturns? Is operational flexibility associated with financial policy decisions?
Which firms get hit more in a recession? The answer to this question is highly important for the speed of recovery or maybe even for future levels of output if firms with growth-options are hit relatively harder than other firms. We attempt to answer this question using Norwegian data on firms' financing during the recent financial crisis.
The determinants of CEO compensation are fairly well researched for public firms, but little is known about how private firm remunerate their CEOs. In this project we will analyze the determinants of CEO compensation in private firms with special emphasis on the potential differences between private non-family and family firms with or without CEOs from the controlling family. We will focus specifically on the family non-family dimension as there are reasons to believe that the CEO compensation differs due to e.g. fewer conflicts of interests between owners and managers in family firms, especially if the CEO is from the controlling family.
How important are start-up conditions (capital and ownership structure) for survival? For how long do start-up conditions matter? Start-up conditions usually imply severe financial constraints: What are the key financial steps after the start-up that matter most for survival? To be able to retain earnings the firm must be highly competitive. How important is the competitive environment on good markets for survival?
Audit quality is important for users of audited financial information in order to make correct investment decisions. Prior studies show that audit quality is not uniform but rather varies between audit firms and audit offices. As auditing is largely based on professional judgment the starting point for this project is that audit quality varies with auditor-in-charge (AIC) characteristics. We focus on the auditor's portfolio of clients as well as on a number of AIC attributes. Each auditor has a unique portfolio of clients and the composition of the portfolio varies in terms of e.g. the number, size and type of clients. Thus, the portfolio reflects and signals the auditor's experience, expertise and overall workload. AIC attributes such as education, years in practice and financial dependency on a single client are factors that are likely to impact competence and independence of the individual auditor. We study how these portfolio and AIC attributes are related to audit quality at the private client segment of the audit market.
The extent to which entrepreneurship pays has been puzzling economics, organization and entrepreneurship scholars for a long time. Empirical research on returns to entrepreneurship has compared earnings, wealth and non-pecuniary rewards between entrepreneurs and employees in paid employment. We advance a complementary perspective to the contemporary in praesenti research. We ask: "to what extent are ex-entrepreneurs rewarded or punished for their earlier entrepreneurial activities?" This ex-post perspective compares ex-entrepreneurs to their counterparts in subsequent paid employment and can potentially amend acquired insights of negative returns from entrepreneurship, which have not taken into account such future cash flows.
The presumption in the takeover literature is that the transaction is initiated by a bidder: The bidder moves first and the target board responds. However, based on SEC filings of completed takeovers of publicly traded targets over the period 1996-2006, we show that the bidder initiated the takeover process in only 40% of the cases, while the target initiated 40% of the time. The remaining 20% represent mostly joint initiations ("mergers of equals") and target shareholders activists.
Being a first-mover in the takeover game affects bargaining power. In this project proposal we suggest to investigate how bidding strategies and bid outcomes depend on the initiating party. Our hypotheses are:
• Target-initiated takeovers involve early-stage auction (prior to the first public bid), which in turn lead to greater average takeover premiums.
• The low incident of bidder-initiated takeovers is a response to the widespread deployment of costly takeover defenses.
• Targets initiating a takeover tend to have small board size, high degree of director independence, low anti-takeover provisions, and high pay-performance incentives.
Although dividend policy is an established area of research, there are few solid conclusions and many unanswered questions. We aim to examine theories whose empirical record is mixed or very thin, using the unexplored universe of private firms. There are many important features of private firms that enable us to push beyond the limits of existing knowledge. The more concentrated ownership structure of private firms allows us to examine the role of dividend policy when its role as a signal to equity investors is minimal. The wide cross-sectional variation in shareholder involvement as directors and officers enables us to test how dividends interact with the separation between ownership and control. The same variability allows us to examine the role of dividend policy in the conflict between majority and minority shareholders, using unusually detailed data on ownership and families. The stronger financial constraint of small firms means we can more carefully explore the role of dividends in the firm’s overall cash management. This is important, since the relationship between cash flow, cash reserves, and investment has been a matter of intense debate, with dividend policy often taken as an exogenous variable. We can test a range of alternative predictions. Do financially constrained firms pay lower dividends to please creditors and shelter investments? Do they hold on to stable dividend payments in order to establish a reputation with prospective equity investors and to smooth their owners’ consumption? Do they hoard cash, or do they adjust their investment and dividend payments to the available cash flow? Is cash management and dividend policy different in private firms due to stronger bank dependence?
Key questions: Do private firms have a different dividend policy than comparable public firms? What is the role of dividends in conflicts between shareholders and managers, between majority and minority shareholders, and between debtholders and shareholders? How do dividends interact with the cash management and investment policy of private firms?
Is the effect of bank relationship on income smoothing related to firm characteristics? Is the effect of bank relationships on income smoothing related to bank characteristics? What is the relationship between smoothing, bank relationships and ownership structure?
Does social capital contribute to the establishment of entrepreneurial firms by increasing the probability that an individual chooses self-employment over wage employment? Does social capital enhance entrepreneurial earnings in the early years of firm development? Do firms in high social capital environments use more trade credit at an early stage of their development then firms in environments with low social capital?
To what extent does auditor remuneration reflect agency conflicts in closely-held private firms in Norway? How do abnormal audit fees relate to potential conflicts between firm and lenders, between firm and suppliers, between firm and customers, between firm and employees, and/or between firm and tax authorities? How does family ownership affect agency conflicts and how do auditors respond to such conflicts?
How do firms adjust operations and policies to smooth investments? How do small firms perform in implementing optimal (smooth) investments? Do these relations depend on financial constraints, firm size, listing status, ownership structure, and family ownership?
Does government ownership impact the handling of CSR? Does a government stakeholder focus on CSR reduce profitability? Does private ownership induce weaker commitment to CSR?
Does financial reporting quality in private family firms differ from financial reporting quality in private non-family firms? Do non-family members on the Board or high quality auditors enhance financial reporting quality? Do non-family members as CEO or strong non-family stakeholders affect financial reporting quality?
Key questions: Do blockholder networks across companies have the same strength as blockholder coalitions within one company? Do different blockholder types form coalitions differently? Do blockholder networks result in greater expropriation?
The first goal of this project is to construct a high-quality database on the corporate finance and governance characteristics of all Norwegian firms with limited liability over the period 1994-2005. This involves about 140 000 listed and non-listed firms per year. The project is feasible because Norway is among the very few countries mandating the publication of full accounting statements and key governance information for all firms regardless of size, industry, and listing status. The second goal is to describe the anatomy of corporate finance and governance in a considerably more comprehensive and precise way than what has been possible so far. The project is unique because almost all existing research in corporate finance and governance studies listed firms. However, non-listed firms account for a much larger portion of economic activity worldwide, existing insight from listed firms may not be easily generalized to non-listed firms, and non-listed firms may allow us to test theories that are difficult to evaluate in listed firms. By offering a first, broad look into the economics of non-listed firms, our project serves as an infrastructure for a series of research projects that will analyze much more focused questions.
Is corporate law the optimal mechanism for promoting good corporate governance? Or, are there other mechanisms – possibly correlated with the quality of corporate law – that more efficiently protect investor control rights? We address this question by exploiting the fact that corporations in pre-1910 Norway were born into an environment with no corporate law. Legal shareholder protections existed only through contract law. Firm-level “bylaws” (statutter) were written into each company’s charter. The bylaws were binding legal contracts backed by contract law, but companies themselves could choose the level of protection offered to shareholders. In 1910, Norway introduced its first corporate law (Aksjeloven), which established minimum requirements and protections to which all corporations were legally bound to adhere. Studying firm behavior before and after the enactment of Norway’s first corporate law creates a natural experiment for studying the effect of corporate law on corporate governance.
This paper documents that stock liquidity improves shareholders' incentive to monitor management. Using a hand-collected sample of contested proxy solicitations and shareholder proposals as occurrences of shareholder activism, we find that poor firm performance increases the probability of shareholder activism and that this relationship is significantly stronger for firms with liquid stock than for other firms. The conclusion that stock liquidity encourages shareholder activism is robust to different measures of firm performance and liquidity. We also document positive abnormal returns for target firms around the announcement date of shareholder activism and conclude that activism creates value
Assessing the cost of capital for the purpose of capital budgeting is one of the most important tasks facing managers. For non-listed firms this normally entails estimating betas of comparable, traded, firms and using the implied cost of capital in their capital budgeting decisions. There are two, potentially severe, problems in the existing methods of estimating the cost of capital. First, if markets are inefficient, beta estimates can be biased due to stock mispricing. Consequently, estimates of firms’ cost of capital will be distorted, leading to inefficient resource allocation both within firms and across firms. Second, assessing the cost of capital for non-listed firms through estimating betas of listed, comparable, firms is a problem because their corporate governance structures are very different. As ownership is substantially more dispersed within listed firms, they could face agency conflicts between managers and shareholders not present within non-listed firms. One consequence of the agency conflicts within listed firms could be overinvestment or underinvestment. To the extent that overinvestment or underinvestment changes the risk profile of firms, applying beta estimates of listed firms to private firm project valuation may be inappropriate. In this project we propose using an approximation for stock returns by estimating the rate of return on physical (real) investment. Relatively recent academic research has shown that investment rates of return correspond closely with stock returns under reasonable assumptions about technology and adjustment costs of investment. Therefore, obtaining the investment rates of returns for a firm and measuring its covariance with the aggregate investment rate of return should provide an investment return beta that can be used to calculate a firm’s cost of equity capital. There are two clear advantages of this approach. First, it is less subject to biases resulting from stock security mispricing. Second, by estimating the investment betas of non-listed firms directly from the investments of non-listed firms, we can obtain better cost of capital measures for private firms that are unaffected by the types of agency conflicts that affect listed firms.
The project has two sub-projects. The first sub-projecs investigates how shareholders choose between issuing and selling new shares in a negotiated transaction and having an auction to sell the new shares. The project investigates this question using unique data from Oslo Børs, where companies go public both selling shares through negotiated private placements and public offerings. The second sub-project investigates if investors that generate a large amount of broker-commissions have a better chance of getting allocations in IPOs. Preliminary evidence seems to support the view that investors that trade frequently, and hence generate a large amounts of commission, get larger allocations in IPOs than other investors.
The project is completed, and the paper has been published in the Accounting Review
Auditing is an essential part of corporate governance because independent auditors lend credibility to manager-prepared financial statements that are distributed to the firm's stakeholders. The auditor must be independent, since users of financial statements cannot be expected to trust the information without confidence in the auditor’s independence. The question of auditor independence has received increased attention from regulators, academics, and practitioners in recent years due to highly publicized audit failures (for instance Enron, Parmalat, Ahold and Finance Credit). Regulators argue that independence is compromised through an auditor’s dependence on fees generated through non-audit services. Academics, however, argue that regulators fail to consider the cost to auditors of compromising their independence, and that regulators ignore the possibility that non-audit services may actually improve audit quality (Watkins et al. 2004). The purpose of this study is to analyze whether auditors are willing to sacrifice their independence in exchange for retaining clients that pay fees for audit and/or non-audit services, using a large sample of Norwegian, privately owned companies. Empirical based knowledge on whether auditor independence is threatened by the economic bond between the auditor and its clients is important input into the ongoing debate regarding the kind of services that auditors may provide to their clients.
I study corporate risk management with property insurance in non-listed small and medium sized firms. I document negative relations between various ownership measures, CEO salary, ownership concentration and aggregate female ownership and insurance use as well as a positive relation between the number of family owners and insurance use. These relations are consistent with self-insurance among CEO-controlled firms, firms with high ownership concentrations, firms with above average female owners and firms with a small number of family owners, given monopolistic insurance premium pricing practices. Indeed, I show that insurers raise premium when firm profitability soars. The above relations are also consistent with stakeholders stipulating less insurance the higher the CEO salary or the higher the ownership concentration, precisely because these firm characteristics proxy inversely for firm risk. This view is supported by negative relations between these ownership variables and the coefficient of variation of revenues. Further, I provide evidence of strong causal relations between insurance use, leverage and liquidity. Specifically, insurance use and liquidity are risk management complements since insurance use exerts a positive influence on corporate liquidity and liquidity exerts a positive influence on insurance use. Finally, ownership concentration and aggregate female ownership show positive relations with liquidity which is consistent with risk aversion motivated hedges.