Ownership, control and firm performance in Europe

This study is motivated by one of the most prevalent properties of modern corporations: separation of ownership and control. Ownership concentration has been one of the corporate governance mechanisms to solve the agency problem between shareholders and management. Existing literature is mainly concerned with the impact of managerial ownership on firm performance. Little evidence is provided on the impact of general ownership concentration, including multiple large shareholders, on firm performance. This study aims to examine the efficiency of ownership concentration as a corporate governance mechanism, and to explore relevant policy implications to improve firm performance. Based on the company ownership data across a sample of 1291 European companies in the year of 2004, this study shows that European companies’ ownership are highly concentrated with the largest three shareholders own more than 60% ownership of company. Industrial companies hold direct controls of European non-subsidiary companies, while private shareholders turn out to be the ultimate owners. On average, there is more than one large shareholder who owns more than 10% of the shares in a European company. A further sample of 655 European companies is used to investigate the relationship between ownership, control and firm performance. A significant non-linear impact of ownership concentration on firm performance with multiple turning points is confirmed. Specifically, Tobin’s Q is highest when the Herfindahl index, which incorporates the degree of dispersion of shareholdings other than the largest one, reaches a value of 0.08. The largest shareholding of 10% might also be able to deliver relatively strong performance. Restructuring owner identities could be another efficient governance approach. Direct control from founder owners, ultimate control from insurance companies, and management ownership are beneficial for firm performance, while government, financial institutions except insurance companies and ultimate control of non-financial corporate owners are found to be detrimental for firm performance. Firm performance can also be improved by strengthening the contestability of the controlling coalition’s power. The impacts of ownership and control on firm performance are found conditioned by country and industry. Therefore policies should be adjusted according to the companies’ institutional environments. Although the endogeneity of ownership concentration and current firm performance is rejected in this study, past firm performance seems to affect current ownership concentration level. Higher accounting rates of return four years ago could result in lower current ownership concentration, while higher last year’s Tobin’s Q could result in higher current ownership concentration. Capital structure is found to be a significant substitute mechanism for ownership. These elements should be taken into account when the ownership governance mechanism is implemented.