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Ownership and Performance in Europe

In this paper, we consider the relationship between performance and ownership concentration in a large number of publicly traded and privately held companies located in smaller European economies (Austria, Belgium, Finland, Ireland, and Ukraine). These countries represent the five legal families (German, French, Scandinavian, Common Law, and Eurasian, respectively), yet are characterized by fairly illiquid and small stock markets. This paper is the first cross-country study we know of to explore the relationship between corporate performance and ownership concentration for both public and private firms from all five legal traditions. Combining two literatures — on ownership concentration and performance as well as on law and finance — we generate our central hypothesis that the relationship between performance and ownership concentration should vary by the level of legal protection afforded small shareholders as well as the type of ownership concentration (we consider the ownership concentration of a single blockholder as well as that of a coalition of the five largest blockholders). Our tobit empirical tests control for firm size (log of total assets as well as log of employees), status as a listed firm, risk (standard deviation of return on assets), ratio of intangible to total assets, status as a financial firm, leverage, and age. The results confirm our hypothesis in that firms located in the country with the lowest level of legal protection in our sample — Ukraine — exhibit a very different relationship between performance and ownership concentration depending on whether we consider the portion of the firm’s equity held by a single shareholder or by a coalition of the five largest shareholders. Specifically, where minority shareholders are least protected, ownership concentration of a single blockholder is negatively related to performance; but the ownership portion of a coalition of the five largest shareholders is positively related to performance. These findings are robust to breaking down the sample by size and by one-digit SIC industry category. We conclude with some implications for the literature and for future research.