Stock price performance and ownership structure during ...

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Stock price performance and ownership structure during

periods of stock market crisis: the Spanish case

Kurt A. Desender *

Miguel Angel Garcia Cestona *

Rafel Crespi Cladera +

First draft: 11 July 2008

ABSTRACT Using Spanish data, we investigate whether the stock price performance depend on the ownership structure of the company during stock market crises. Our results show that both inside ownership and ownership concentration are considered by investors to make price adjustments during periods of crisis, after controlling for size and sector. Stock market performance is positively related to insider ownership and the number of foreign shareholders and negatively related to ownership concentration and the number of financial shareholders. In addition, we find that family controlled firms have a much larger proportion of inside ownership. Therefore, we test for difference between the stock price performance of family controlled firms and non-family controlled firms. We find that family controlled firms perform 5,6% better than non-family controlled firms and that firms with dispersed ownership outperform non-family controlled firms with around 7,8%. Furthermore, when we split the family controlled firms into founding family controlled firms and non-founding family controlled firms, we find that founding have on average 11,6% better stock price performance compared to non-family controlled firms. For non-founding family firms, we also find a positive coefficient although it is not significant. Key Words: Ownership structure, stock price performance, stock market crisis JEL classification: G3; G32; G34

* Corresponding author: [email protected]

*Dep. Economia Empresa; Universitat Autonoma de Barcelona; Campus Bellaterra; 08193 Barcelona + Dep. Economia i Empresa, Universitat Illes Balears; Campus Cra. Valldemossa. 07071 Palma Mallorca

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I. INTRODUCTION

The disclosure of “true and fair” financial earnings is crucial to corporate governance because it

provides outsiders with a basis to monitor their claims and exercise their rights (OECD

Principles of Corporate Governance, 1999). The wave of accounting scandals, involving several

leading companies admitting to have misstated their financial statements and promoted a false

impression of their economic status, increased investor’s scepticism of the quality of the

financial reporting. Corporate fraud, defaults and plunging stock prices were followed with

stories of excessive executive compensation, insider dealing, and systematic failures in

management and board oversight, resulting in a drop in investor confidence (Rezaee, 2002). In a

response, corporate governance codes and legislation was implemented all over to world to

improve financial reporting quality and restore investor’s trust.

Between March 2000 and October 2002 the Ibex 35, the benchmark Spanish stock market index

plunged 58%, going form a market capitalization of 475.000 million to a market capitalization

of 205.000 million in just 30 months. Other European stock market suffered similar losses: the

FTSE-100 lost over the same period about 43%, the DAX-30 dropped about 67% and the CAC-

40 lost about 58%.The dramatic drop of the stock markets was triggered by the burst of the

technology bubble in 2000 and a wave of corporate scandals in 2001 and 2002.

Shleifer and Vishny (1997) state that ownership concentration is, along with legal protection,

one of two key determinants of corporate governance. In addition, Demsetz and Villalonga

(2001) argue that in order to treat ownership structure appropriately and to account for the

complexity of interests represented in a given ownership structure, both dimensions of

ownership structure – insider ownership and ownership concentration – must be considered.

Few studies have investigated whether investors give importance to the ownership structure for

making investment decisions. The few studies available have focused on the East-Asia crisis

(Baek et al., 2004; Mitton, 2002). Related literature has investigated the link between ownership

and firm accounting performance (McConnell and Servaes, 1990; Demsetz and Villalonga,

2001; De Miguel et al., 2004; Boubraki et al., 2005) as well as the link between ownership and

quality of financial statements (Warfield, Wild, and Wild, 1995; Sánchez-ballesta and García-

Meca, 2007).

The Spanish context presents an interesting setting to investigate the influence of ownership

structure on stock price performance. Spain has an institutional setting similar to most

continental countries, classified by La Porta et al. (1997) as French-origin civil law countries,

characterized by high concentration of ownership, weak investor rights and boards which are

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not independent of controlling shareholders. In addition, prior research on the link between

stock price adjustments and ownership structure during periods of crisis have focussed on the

East-Asian stock market crisis of 1997 (Mitton, 2002; Baek et al., 2004). To our knowledge,

this is the first study to investigate the importance of ownership to explain stock price

adjustments considering a Continental European stock market.

Using Spanish data, we investigate whether the stock price performance depend on the

ownership structure of the company during stock market crises. Our results show that both

inside ownership and ownership concentration are considered by investors to make price

adjustments during periods of crisis, after controlling for size and sector. Stock market

performance is positively related to insider ownership and the number of foreign shareholders

and negatively related to ownership concentration and the number of financial shareholders. In

addition, we find that family controlled firms have a much larger proportion of inside

ownership. Therefore, we test for difference between the stock price performance of family

controlled firms and non-family controlled firms. We find that family controlled firms perform

5,6% better than non-family controlled firms and that firms with dispersed ownership

outperform non-family controlled firms with around 7,8%. Furthermore, when we split the

family controlled firms into founding family controlled firms and non-founding family

controlled firms, we find that founding have on average 11,6% better stock price performance

compared to non-family controlled firms. For non-founding family firms, we also find a positive

coefficient although not significant.

This study builds on prior research in several ways. Firstly, unlike most existing research, which

usually studies just one aspect of ownership structure, we focus on several dimensions:

ownership concentration, insider ownership, foreign shareholdings and shareholdings by

financial institutions. Secondly, this is the first paper to investigate the importance of ownership

structure from an investor’s perspective using data using a Continental European stock market.

Thirdly, unlike existing research on the relationship between ownership and stock market

performance, we investigate investor’s appreciation of family controlled ownership compared to

non-family controlled ownership.

II. MOTIVATION AND OBJECTIVES OF THE STUDY

In early November 2001, Enron revealed it had overstated earnings by nearly $600 million

during the past five years. Credit agencies rapidly downgraded Enron's bonds to "junk" status.

Less than a week later, Enron declared bankruptcy and laid off 4,000 employees. The

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revelations of the fraud carried out at Enron initiated a wave of accounting scandals in 2002—

including those at WorldCom, Tyco and Adelphia amongst others. With assets of $63 billion

and $104 billion, Enron and WorldCom represented the largest corporate bankruptcies in U.S.

history. In December 2003, Parmalat collapsed with a debt of €14.5 billion. This debacle

shattered any illusions that accounting and boardroom scandals were uniquely an American

phenomenon. Like the Enron case, Parmalat’s underlying problems were the massive fraud that

was facilitated by the prevalence of special purpose entities (SPEs) and offshore subsidiaries

that were used by the managers and officers to carry out illicit related party transactions. But,

unlike Enron, it was Parmalat’s family controlled management and advisors that structured the

group’s various financial arrangements to enrich members of the Tanzi family at the expense of

the shareholders and creditors (Ferrarino and Guidici, 2005). Mayor European scandals include

Ahold, Adecco, Parmalat and Vivendi. The disclosure of “true and fair” financial earnings is

crucial to corporate governance because it provides outsiders with a basis to monitor their

claims and exercise their rights. In the presence of extensive earnings management, financial

reports inaccurately reflect firm performance and consequently weaken outsiders’ ability to

govern the firm.

A study by Huron Consulting Group (2005) shows a dramatic increase in earnings restatements

of American firms after 1999: in 1990, there were 33 earnings restatements; in 1995, there were

50; then, the rate truly accelerated to 216 in 1999; to 233 in 2000; to 270 in 2001; to 330 in

2002; to 323 in 2003 and then in 2004, the number peaked at 414. In addition, The U.S.

Government Accountability Office (GAO) Report found that revenue recognition issues

accounted for almost 38 percent of the restatements it identified over the period 1997-2000, and

the Huron Consulting Group study also found it to be the leading accounting issue underlying

an earnings restatement between 1999 and 2003. Studying a comprehensive sample of firms that

restated annual earnings from 1971 to 2000, Richardson, et al. (2003) reported a negative

market reaction to the announcement of the restatement of 11% over a three-day window

surrounding the announcement. Moreover, using a wider window that measured firm value over

a period beginning 120 days prior to the announcement to 120 days after the announcement,

they found that restating firms lose on average 25 percent of market value over the period

examined and this is concentrated in a narrow window surrounding the announcement of the

restatement.

The wave of accounting scandals, involving several leading companies admitting to have

misstated their financial statements and promoted a false impression of their economic status,

increased investor’s scepticism of the quality of the financial reporting. There was also a general

perception that more accounting scandals were just waiting to be uncovered, which was

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reflected in decreasing the stock prices in 2001, 2002, and 2003 (SEC, 2004). Corporate

defaults and plunging stock prices were followed with stories of excessive executive

compensation, insider dealing, and systematic failures in management and board oversight that

eventually led to a series of high-profile criminal prosecutions of executives and senior

management. In a response, corporate governance codes and legislation was implemented all

over to world to improve financial reporting quality and restore investor’s trust. In the US, the

Sarbanes Oxley Act of 2002 introduced far-reaching and significant changes to corporate

governance and disclosure obligations of publicly traded companies in the US and its foreign

subsidiaries. Its objectives were first, to quickly restore investors’ confidence in the markets,

and second to prevent further occurrence of corporate fraud.

In Spain, even though there were no mayor corporate scandals, the IBEX35, the Spanish

benchmark stock market index, lost about 58% in just 30 months. Other European stock market

suffered similar losses. Spain introduced the Aldama report to foster the transparency and

security in the markets and in listed companies (2002) and the Unified Code of

Recommendations for the Good Governance (2006) in a response to improve corporate

governance and restore investor confidence.

Very few studies have investigated whether investors give importance to the ownership

structure for making investment decisions. The few studies available have focused on the East-

Asia crisis (Baek et al., 2004; Mitton, 2002). Overall, their findings suggest that firm-level

differences in corporate governance measures play an important role in determining changes in

firm value during the financial crisis in East-Asia and Korea. Related literature has investigated

the link between ownership and firm accounting performance (McConnell and Servaes, 1990;

Demsetz and Villalonga, 2001; De Miguel et al., 2004; Boubraki et al., 2005) as well as the link

between ownership and quality of financial statements (Warfield, Wild, and Wild, 1995;

Sánchez-ballesta and García-Meca, 2007).

The objective of this study is to investigate the relationship between stock market performance

and ownership structure. If investors take ownership structure into account to evaluate stock

prices, we would expect to find significant differences in the stock price adjustments depending

on the ownership structure. For example, if investors are more confident that pre-crisis stock

prices of family controlled firms better reflect the true value compared to non-family controlled

firms, we would expect the price adjustment during the crisis period to be smaller. To our

knowledge, this study is the first to investigate the relationship between stock market

performance and ownership structure considering a Continental European stock market.

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The advantage of focusing on crises period is that it allows us to examine unambiguously the

effect of corporate governance on firm value (Baek et al., 2004). Because the crisis was, by all

accounts, an unexpected event, it presents an interesting opportunity to study the proximate

effect of corporate governance on stock price adjustments during a period of crisis. Using a

given set of measures for corporate governance immediately before the external shock to

explain changes in firm value, any spurious causality caused by the endogeneity problem can

largely be eliminated.

III. PRIOR LITERATURE AND HYPOTHESES DEVELOPMENT

Accounting data is used to help monitor and regulate the contractual relations between many of

the firm’s stakeholders. Information asymmetries between insiders and outsiders reduce the

likelihood that insiders are replaced and lower the threat of firm takeovers (Jensen and Ruback,

1983; Shleifer and Vishny, 1989). Moreover, they allow insiders to become entrenched and

derive private control benefits by consuming perquisites, shirking, building empires or actually

diverting profits and assets at the expense of shareholders (e.g., Jensen and Meckling, 1976).

Zingales (1994) and Shleifer and Vishny (1997) argue that insiders have a natural incentive to

hide their private control benefits. Insiders can mask their private control benefits by managing

the level and the variability of reported earnings to reduce the likelihood of outside intervention.

Insiders can overstate earnings to avoid detection of mismanagement or outright diversion by

insiders. Within this framework, insiders will become more involved in the company when they

own greater shares of the firm and, consequently, the need for outside monitoring will be

reduced, as long as the interests of insiders and external shareholders converge. Thus, under the

alignment hypothesis, insider ownership can be seen as a mechanism to constrain the

opportunistic behaviour of managers, and, therefore, the magnitude of earnings manipulation is

predicted to be negatively associated with insider ownership (Warfield et al., 1995).

On the other hand, when there is little separation between owners and managers, managers face

less pressure from capital markets to signal the firm value to the market and they pay less

attention to the short-term financial report (Jensen, 1986; Klassen, 1997); therefore, highly

invested managers are more likely to manipulate earnings, since this lack of market discipline

may lead insiders to make accounting choices that reflect personal motives rather than firm

economics. In this situation, the entrenchment hypothesis states that high levels of insider

ownership can become ineffective in aligning insiders to take value-maximising decisions,

which may lead earnings management to increase (Morck et al., 1988). The risk of

expropriation exists for several reasons. First, a manager of a firm who is also a dominant

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shareholder is irreversibly entrenched. An entrenched manager cannot be displaced even if his

performance is judged to be unsatisfactory (Daniels & Halpern, 1996). Second, if the manager is

also a dominant shareholder, he will block every attempt at a hostile takeover (Stulz, 1988). In

this case, expropriation takes the form of agency costs that affect the firm's performance.

Stock prices are assumed to reflect all possible available past information and new information

is incorporated instantaneously in the stock price. The short term crises periods that we consider

are generally associated with information on unreliable financial statements in US firms or cases

of corporate fraud. Given the increase of reported earnings overstatements and cases of

corporate fraud over the period 2000-2002, we expect that stock price adjustments will reflect,

at least partially, the investor’s perception of the probability that reported accounting numbers

do not accurately reflect reality.

Empirical results regarding the association between insider ownership and earnings

management is mixed. Warfield et al. (1995) examine US data to find a negative relationship

between managerial ownership and earnings management. On the other hand, Gabrielsen et al.

(2002) find a positive but non-significant relation between managerial ownership and earnings

management in a sample of Danish firms, which they attribute to the different institutional

settings between the US and Denmark. That is, given the greater concentration of ownership in

Denmark, other hypotheses may play a more important role (Gabrielsen et al., 2002,): (a) the

information asymmetry, which leads investors to demand better accounting information when

ownership is diffuse; (b) the negative influence of earnings quality on managerial ownership; (c)

and the entrenchment hypothesis. Gabrielsen et al. (2002) suggest that their results may apply to

companies in a variety of non-US economies, because managerial ownership in Danish firms,

which is much larger than in US firms (mean of 59 per cent versus 17 per cent), would be

similar to most non-US countries. Furthermore, Sánchez-ballesta and García-Meca (2007) find a

non-linear relationship between insider ownership and earnings management for a sample of

Spanish listed non-financial companies during the period 1999-2002. This supports the

hypothesis that insider ownership contributes to constraining earnings management when the

proportion of shares held by insiders is not too high. When insiders own a large percentage of

shares, however, they are entrenched and the relation between insider ownership and

discretionary accruals reverses. If investors perceive ownership to be an important element in

assuring financial reporting quality, we would expect to find a significant relationship between

ownership structure and stock market performance. Therefore:

H1: The higher the inside ownership, the better the stock price performance during the crisis

period

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Since dispersion creates free-riding problems and makes manager monitoring difficult, a

positive relation between ownership concentration and firm performance is expected. However,

concentrated ownership may also lead to worse performance, as the expropriation hypothesis

proposes. Shleifer and Vishny (1997) argue that in some countries the agency problem comes

from the conflict between controlling owners and minority shareholders, instead of between

managers and dispersed shareholders. In these cases, large shareholdings are costly, because

majority owners can redistribute wealth—in both efficient and inefficient ways—from other

minority shareholders, whose interests need not coincide.

Considering both the monitoring and expropriation effects, Gedajlovic and Shapiro (1998) show

evidence of a non-linear relationship between ownership concentration and profitability in US

and German firms. Nevertheless, no relationship between concentration and profitability was

found in the UK, France and Canada. In addition, Lehmann and Weigand (2000) confirm the

benefits of large shareholders in Germany, but only in the case of banks, since the presence of

non-financial large owners negatively affects firm profitability. This is however in contrast with

recent research on the monitoring role of banks in Germany (Dittmann et al., 2008). In addition,

Kaplan and Minton (1994) and in Morck, Nakamura and Shivdasani (2000), confirm the

predicted monitoring and disciplinary role played by large shareholders in Japan. Furthermore,

Fang and Wong (2002) found that earnings are more informative for firms with less

concentrated ownership in East Asian countries and Sánchez-Ballesta and García-Meca (2007)

found no relationship between ownership concentration and earnings management using

Spanish data. Finally, Mitton (2002) found that during the East Asian financial crisis of 1997–

1998 firms with higher outside ownership concentration show significantly better stock price

performance. Moreover, Mitton (2002) finds that the return premium associated with higher

ownership concentration is largely attributable to large blockholders that are not involved with

management. These results may imply that institutional differences between countries matter,

and that corporate governance systems determine the above relation.

H2: The higher the ownership concentration, the better the stock price performance during the

crisis period

H3: The higher the number of significant shareholders, the better the stock price performance

during the crisis period

H4: The higher the number of financial institutions as significant shareholders, the better the

stock price performance during the crisis period

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Baek et al. (2004) focussed on Korean Business groups, chaebols, and found that during the

1997 Korean financial crisis, chaebol firms with higher ownership concentration by unaffiliated

foreign investors experienced a smaller reduction in their share value.

H5: The higher the number of foreign shareholders, the better the stock price performance

during the crisis period

Most firms around the world are family-owned businesses (Burkart, Panunzi, and Shleifer,

2003). Even among the Standard and Poor (S&P) 500 and Fortune 500 companies, which are

the least likely to be family owned, one third have founding family members actively involved

in the businesses (Anderson and Reeb, 2003; Shleifer and Vishny, 1986; Weber et al., 2003).

Anderson and Reeb (2003) reveal that family ownership is both prevalent and substantial, due to

its efficient organizational structure. They argue that founding families typically have

undiversified portfolios and are concerned with firm and family reputation. Founding families

are more likely to forgo short-term benefits from managing earnings because of the incentives to

pass on their business to future generations and to protect the family’s reputation. In addition,

families, beyond their ownership stake, can exercise additional power and possibly reduce

agency problems by placing one of their members in the CEO position. Doing so, they eliminate

divergent management-shareholder objectives and information asymmetry. Besides, Anderson

and Reeb (2003) found that bondholders view founding family ownership as an organizational

structure that better protects their interests, since founding family ownership reduces the cost of

debt financing relative to non-family firms.

In the US, family firms tend to have higher valuations and profitability than non-family firms

(McConaughy et al., 1998 and Anderson and Reeb, 2003). Villalonga and Amit (2004) find that

the “US family premium” is mainly due to founding family CEOs. In addition, using data from

the S&P 500 companies during the period 1994–2002, Wang (2006) provide evidence that

founding family ownership is associated with higher earnings quality, a finding consistent with

the alignment effect of family ownership. In addition, Joh (2003) finds that during the 1993–

1997 period, Korean firms whose controlling family shareholders had more ownership

outperformed those where the family members had less in term of accounting income. In

contrast, Baek et al. (2004) found that chaebol firms with concentrated ownership by controlling

family shareholders experienced a larger drop in the value of their equity.

H6: Family controlled firms are associated with higher stock price performance during the

crisis period compared to non-family controlled firms

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IV. SAMPLE AND DATA

Our sample is drawn from the population of Spanish non-financial firms listed on the Madrid

Stock Exchange during 2000–2002. Fundamental stakeholders in the Spanish corporations

include banks and industrial firms, and the main agency problem arises from controlling and

minority shareholders, as occurs in most European countries. Fundamental stakeholders in the

Spanish corporations include banks and industrial firms, although the role of financial

institutions is not as prevalent as in other countries such as Germany and Japan, and the main

agency problem arises from controlling and minority shareholders, as occurs in most European

countries. For this study, we consider all non-financial listed firms for which we could retrieve

the stock prices four the four crises periods we consider (400 observations). We loose several

observations due to missing data related to the firm’s beta (30 missing observations).

Furthermore, we also excluded firms with very low trading volume. We excluded all firms with

an average trade volume of less than 10.000 shares per day (67 illiquid observations). The final

sample consists of 303 observations.

The principal sources of our data are the SABI database (System of Iberian Financial Statement

Analysis), made by Bureau Van Dijk, which provides financial data for those companies that

submit consolidated financial statements, Thomson’s WorldScope, the Madrid Stock Exchange,

and the database from the CNMV (Spanish Securities and Exchange Commission), which

provides information on all shareholders with ownership of at least 3 per cent, as well as

directors’ ownership of listed firms. This cut-off point is mainly driven by the disclosure

regulation in countries such as France and Germany. To calculate the ownership measures, we

consider both direct and indirect shareholding. The ownership data is pre-crisis data. We

consider all declared changes in ownership until the last day before the crisis. We also check for

significant changes in ownership during the crisis.

V. MODEL AND VARIABLE SPECIFICATION

The aim of our paper is to examine whether investors take ownership structure into account

during periods of crisis. In order to evaluate the effect of ownership structure on unexpected

returns, we regress the abnormal returns on different specifications of ownership and control for

sector and size. The methodology adopted is similar to Mitton (2002) and Baek et al. (2004).

Crisis Period Abnormal Return= f(Ownership structure Variables, size, industry dummy)

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Dependent variable To determine the crisis periods we examine the overall stock market shocks. We determine

short term stock market drops of 20% or more. Over the period January 2000 and January 2004,

we identified four periods between one and two months in which the stock market index

dropped at least 20%. Graph1 shows the evolution of the Spanish stock market index from

January 2000 to December 2002. On the graph we identified the four periods we consider. Table

1 presents the exact dates of the start and termination of the crisis as well as a brief description

of the origin of the crisis.

To measure stock price performance during the crisis we use abnormal returns for the different

crisis periods using the CAPM model. We use the IBEX35 as reference index and obtain the

beta’s from the Sabi (Bureau Van Dijk) database.

Explanatory variables

For the ownership structure variables, we calculate several measure to capture both inside and

outside ownership. We measure inside ownership (inside_own) as the total shareholdings by the

board of directors, similar to Sánchez-ballesta and García-Meca (2007). To measure ownership

concentration we use several specifications in line with La Porta et al. (1999), Demsetz and

Villalonga (2001), De Miguel et al. (2004), Boubraki et al. (2005), Galvé and Salas (2005) and

Sánchez-ballesta and García-Meca (2007). We define concentrated ownership in terms of total

proportion of shareholdings held by all significant shareholders, the proportion held by the

largest shareholder (SH1) and using a dummy variable indicating whether the largest

shareholders has at least 20% of the shares (D_Controlled).

Besides we investigate whether the total number of significant shareholders (N_SH) and the

number of foreign shareholders (N_foreignSH) is related with stock price adjustments.

Furthermore, we split the total number of significant shareholders into three categories to test

whether the presence of financial institutions improves stock performance. We include number

of non-financial shareholders (N_Non-Fin), number of financial shareholders (N_Fin) and

number of government shareholders (N_Gov).

Furthermore, we investigate whether family controlled firms face smaller price reductions

compared to firms with dispersed ownership and non-family controlled firms. We divide our

sample into 3 categories in line with Anderson and Reeb (2003) and Villalonga and Amit (2004):

Family-controlled firms (Fam-con), Non-Family controlled firms (NF-con) and firms with

dispersed ownership (Disp). Two aspects are most relevant for the definition: ownership

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structure and managerial/ board positions in the company. We classify a firm as a family firm if

(1) the family is the largest shareholder, (2) has at least 20% of the shares and (3) holds a

position on the board or is involved in management of the company. Controlled firms are those

firms, which are non family firms and where there is at least one shareholder with a minimum

stake of 20%. Firms with dispersed ownership are those firms in which no individual

shareholder or group of shareholders hold more than 20%. This is in line with previous

literature (Faccio et al., 2001, Anderson and Reeb, 2003, La Porta, 1999). Furthermore, we

investigate whether there founding family controlled firms (Fam – Founder) do better than non-

founding family controlled firms. (Fam –NF). We classify a family controlled firm as founder

family controlled if the founder or one its heirs has an important stake in the company (>20%)

or holds an important position in the company (CEO or chair).

Control variables

We use other variables to control for factors that could affect stock price performance. The first

is firm size, measured by the logarithm of total assets. We also include dummy variables for

seven industries, using NACE-1digit industry classification.

VI. RESULTS

The descriptive statistics of the variables are shown in Table 2. The average return during the

short term crisis period was -15%. In line with financial theory we find that the abnormal return

is zero, meaning that the expected return using the beta is on average equal to the realised

return. The variation in realised return and abnormal return are high. The highest drop over a

short term crisis period was 95% and the highest jump was 39%. The average beta is 0.62.

The high degree of ownership concentration in Spain in comparison to other countries is

reflected in the average value for total concentration of 54.31 per cent, the average ownership

stake of the biggest shareholder of 30,4% and the high proportion of controlled firms (i.e. firms

in which the biggest shareholder holds at least 20%) of 65%. Insider ownership shows a mean

of 12.5 per cent in our sample, which is similar to the values reported in studies such as Morck

et al. (1988), Warfield et al. (1995) and Cho (1998) for the US (10.6; 17 and 12.14,

respectively), although lower than the values reported by Gabrielsen et al. (2002) for Denmark

(59 per cent). On average, non-financial hold the largest stake (35%), compared to an average

stake of 15% for financial shareholders. There are, on average 4 significant shareholders, of

which 2.37 are non financial and 1.54 are financial. Furthermore, almost 40% of Spanish listed

companies have at least one foreign significant shareholder. For these firms, there are on

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average 2.74 foreign shareholders with a stake of 11.26%. For the entire sample, we find that

roughly one third of the firms are family controlled firms, one third are non-family controlled

firms and one third are firms with dispersed ownership.

We consider three measures for ownership concentration: Total concentration, SH1 and

D_controlled. The correlation between these three measures is 0.7, 0.7 and 0.73. From the

correlation matrix in table 3, we observe high correlations between total concentration and

board ownership and the number of non financial shareholders. To reduce multicollinearity

problems, we focus our analysis on two measures of ownership concentration: SH1 and

D_controlled.

Table 4 provides the regression models to test the first 5 hypotheses. Model 1 presents the

model without including any of the explanatory variables. We find that sector dummies and size

explain almost 13% of the abnormal return. In model 2, we add board ownership and ownership

concentration measures as a dummy variable indicating whether the largest shareholder (or

group) holds at least 20% of the shares. We find that both the ownership concentration and

inside ownership are significant: the higher the inside ownership, the higher the abnormal

returns and the lower the ownership concentration, the higher the abnormal returns. We repeated

the analysis using the shareholdings by the largest shareholder (sh1), to check for consistency

and found similar results. In model 3, we test the hypothesis that investors positively evaluate

the total number of significant shareholders. The coefficient for total number of shareholders is

negative, but insignificant. In model 4, we split the number of shareholders into three categories

and find that the number of financial institutions is significantly associated with stock prices.

We find that the higher the number of financial shareholders, the larger the drop in abnormal

returns. This is in line with Dittman et al. (2008) who find evidence that the presence of bankers

on the board causes a decline in the valuations of non-financial firms. In model 5 we evaluate

the influence of foreign shareholders and find a significant positive association. This is in line

with Baek et al. (2004). In model 6 we include the variables from model 4 and 5 in the same

model and find consistent results, while in model 7 we use a different measure of ownership

concentration, i.e. the shareholdings by the largest shareholder, and find again consistent results.

We also found that the total proportion of all significant shareholders is significantly related to

abnormal returns if we introduce it in model 1. Overall the results from table 4 show that both


adjustments during periods of crisis. Stock price performance is positively related to insider

ownership and the number of foreign shareholders and negatively related to ownership

concentration and the number of financial shareholders.

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In table 4 we found that firms with higher ownership concentration have a worse stock

performance and firms with higher insider ownership show better stock performance. Both

family controlled and non-family controlled firms typically have higher levels of ownership

concentration and family controlled firms have higher insider ownership. Therefore we suspect

that family controlled firms suffer lower stock price drops in periods of crisis. Table 5 present

the mean values for the variable we consider. We also test whether the means are significantly

different. We find big differences between the firms with dispersed ownership on the one hand

and family controlled and non-family controlled firms on the other hand in terms of total

ownership concentration, the size of the largest shareholder, the number of foreign shareholders

and the number of financial shareholders. As we stated previously we find that family controlled

firms have a much larger proportion of inside ownership (26,6% against 8,8% for non-family

controlled firms and 3,4% for firms with dispersed ownership). Family firms also have a higher

proportion of non-financial shareholders.

Before testing hypotheses 6 which type of ownership enjoys the best stock price perform during

periods of crisis, we look at the distribution of family controlled, non-family controlled and

firms with dispersed ownership over the sectors and size quartiles. Results could be biased if we

would find a large concentration of one type in one particular sector or size quartile, even

though we control for both sector and size in the analysis. Table 6 and 7 give an overview of the

distribution over sector and size. We also present average abnormal returns for each sector and

size quartile. We find that family firms have a high representation in the first sector. The

average abnormal returns for this sector are almost the same as the average of all sectors. For

the distribution over size quartiles, we also find no clear indication of concentration. Almost

half of the family controlled firms and firms with dispersed ownership are in Q3 or Q4. We find

that larger companies have better performance. Overall there is no clear concentration of certain

types of firms in one or more specific sectors or size quartile.

Table 8 presents the regression analysis to test which type of ownership enjoys the best stock

price performance during periods of crisis. Model 8 introduces ownership type into model 1.

We find that, in line with our previous analysis (models 2-7), that firms with dispersed

ownership outperform non-family controlled firms with around 7,8%. Furthermore, we find that

family controlled firms perform 5,6% better than non-family controlled firms, confirming our

hypothesis. Model 9 introduces the number of non-financial shareholders, the number of

financial shareholders, the number of governmental shareholders and the number of foreign

shareholders. The results are consistent with our previous results. In model 11 we split the


controlled firms. We find that founding have on average 11,6% better stock price performance

15



Finally, we test the importance of insider ownership, ownership concentration and the number

of shareholders of different types for each of the categories previously defined. Several papers

have documented that when ownership gets beyond a certain level, typically around 20%-25%,

the relationship between ownership concentration and firm performance inverses. In the

previous analysis we found that the larger the concentration, the poorer the stock price

performance and the larger inside ownership, the better stock price performance. If these

relations invert after 20%, we would expect to see opposite significant relationships for the

firms with controlled ownership, i.e. family controlled and non-family controlled firms. Table 9

presents the results. Once we control for the differences in ownership type, we find that the

number of financial shareholders and the number of foreign shareholders are only significantly

(negatively and positively) to stock price performance for firms with dispersed ownership. Only

for non-family controlled firms, inside ownership and ownership concentration are significantly

associated with stock price performance. We find that the higher the inside ownership and the

higher the ownership concentration, the better the stock price performance.

VII. CONCLUSIONS

The wave of accounting scandals, involving several leading companies admitting to have

misstated their financial statements and promoted a false impression of their economic status,

increased investor’s scepticism of the quality of the financial reporting. Corporate defaults and

plunging stock prices were followed with stories of excessive executive compensation, insider

dealing, and systematic failures in management and board oversight. In a response, corporate

governance codes and legislation was implemented all over to world to improve financial

reporting quality and restore investor’s trust. In the US, the Sarbanes Oxley Act of 2002

introduced far-reaching and significant changes to corporate governance and disclosure

obligations of publicly traded companies in the US and its foreign subsidiaries. Its objectives

were first, to quickly restore investors’ confidence in the markets, and second to prevent further

occurrence of corporate fraud. In Spain, even though there were no mayor corporate scandals,

the IBEX35 went from a market capitalization of 475.000 million to a market capitalization of

205.000 million, i.e. a loss of 58%, in just 30 months. Other European stock market suffered

similar losses.

16

Using Spanish data, we investigate whether the stock price performance depend on the

ownership structure of the company during stock market crises. Our results show that both


adjustments during periods of crisis, after controlling for size and sector. Stock market

performance is positively related to insider ownership and the number of foreign shareholders

and negatively related to ownership concentration and the number of financial shareholders. In

addition, we find that family controlled firms have a much larger proportion of inside

ownership. Therefore, we test for difference between the stock price performance of family

controlled firms and non-family controlled firms. We find that family controlled firms perform

5,6% better than non-family controlled firms and that firms with dispersed ownership

outperform non-family controlled firms with around 7,8%. Furthermore, when we split the


controlled firms, we find that founding have on average 11,6% better stock price performance



We contribute to the current literature, firstly, by focussing on several dimensions of ownership:

ownership concentration, insider ownership, foreign shareholdings and shareholdings by

financial institutions. Secondly, this is the first study to investigate the importance of ownership

structure from an investor’s perspective using data from a Continental European stock market.

Finally, unlike existing research on the relationship between ownership and stock market

performance, we investigate investor’s appreciation of family controlled ownership compared to

non-family controlled ownership.

17

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Table 1: Crisis periods to consider:

Start date Final date drop Cause

08/03/2000 24/05/2000 20.3% (dot-com bubble burst)

06/10/2000 04/12/2000 20.5% (Telecom crisis ; Cisco, Alcatel, Lucent)

28/08/2001 21/09/2001 22.4% (9-11 attack)

03/06/2002 24/07/2002 24.5% (Corporate scandals: WorldCom, AOL, Merck, Tyco)

Table 2: Descriptive statistics

Variable Obs Mean Std Dev Min Max

Return 303 -0,15 0,17 -0,95 0,39

Abnormal return 303 0,00 0,19 -0,84 0,52

Beta 303 0,62 0,36 0,01 1,34

Ln(Total assets) 303 13.78 1.67 10.40 18.27

Total concentration 303 54,31 22,54 6,88 99,00

Free float 303 45,69 22,54 1,00 93,12

SH1 303 30,64 20,30 2,2 95,03

D_Controlled ownership 303 0,65 0,47 0 1

Non-fin SH 303 34,55 26,47 0 96,28

Fin SH 303 15,38 16,89 0 80,35

Gov SH 303 2,27 9,87 0 75,9

N_non-fin 303 2,37 1,90 0 10

N_fin 303 1,54 1,47 0 7

N_Gov 303 0,10 0,36 0 3

N_SH 303 4,01 2,24 1 12

Inside_own 303 12,48 21,43 0 91,28

D_foreign_SH 303 0,38 0,49 0 1

foreignSH | foreign_SH >0 116 11,26 8,77 1,94 49,14

N_foreignSH | foreign_SH >0 116 2,74 1,78 1 8

disp 303 0,35 0,48 0 1

Fam-con 303 0,32 0,47 0 1

Total concentration: total proportion of shareholdings by significant shareholders SH1: proportion of shares of the largest shareholder D_Controlled ownership: dummy indicating whether the SH1>20% Non-fin SH: total shareholdings by non-financial shareholders Fin SH: total shareholdings by financial shareholders Gov SH: total shareholdings by government N_non-fin: number of significant non-financial shareholders N_fin: number of significant financial shareholders N_Gov: number of governmental shareholders N_SH: number of all significant shareholders Inside_own: inside ownership D_foreign_SH: dummy indicating whether there is at least one significant foreign shareholder ForeignSH: total proportion of shareholdings by foreign investors Disp: dummy variable indicating whether SH1<20% Fam-Com: Dummy variable indicating whether the company is family controlled

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Table 3: Correlation matrix

total sh1 Inside_own N_for.SH N_SH Fam-con disp N_non-fin N_fin

Total_conc 1

sh1 0,7** 1

Inside_own 0,41** 0,34** 1

N_foreignSH 0,09 -0,13** -0,02 1

N_SH 0,3** -0,34** 0,15** 0,35** 1

fam 0,41** 0,33** 0,45** -0,04 0,2** 1

disp -0,7** -0,73** -0,31** 0,23** 0,13** -0,48** 1

N_non-fin 0,44** -0,13** 0,31** 0,18** 0,76** 0,39** -0,08 1

N_fin -0,09 -0,35 -0,14** 0,3** 0,56** -0,15** 0,31** -0,1* 1

N_Gov -0,05 0,02 -0,15** -0,04 -0,06 -0,19** -0,05 -0,17** -0,12**

Total_conc: total proportion of shareholdings by significant shareholders SH1: proportion of shares of the largest shareholder Inside_own: inside ownership N_ForeignSH: total number of foreign shareholders N_SH: number of all significant shareholders Disp: dummy variable indicating whether SH1<20% Fam-Com: Dummy variable indicating whether the company is family controlled N_non-fin: number of significant non-financial shareholders N_fin: number of significant financial shareholders N_Gov: number of governmental shareholders

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Table 4: Regression analysis

M1 M2 M3 M4 M5 M6 M7

Dep var: AR

Intercept -0,359** -0,327** -0,285** -0,325** -0,301** -0,262** -0,287**

(0,109) (0,108) (0,112) (0,116) (0,109) (0,117) (0,116)

D_Controlled -0,069** -0,075** -0,081** -0,057** -0,057**

(0,023) (0,024) (0,025) (0,024) (0,025)

SH1 -0,002**

(0,001)

Inside_own 0,001** 0,001** 0,001** 0,001** 0,001** 0,001**

(0,001) (0,001) (0,001) (0,001) (0,001) (0,001)

N_SH -0,007

(0,005)

N_non-fin -0,002 -0,006 -0,011

(0,007) (0,007) (0,007)

N_Fin -0,016** -0,022** -0,027**

(0,008) (0,008) (0,009)

N_Gov -0,013 -0,015 -0,026

(0,033) (0,033) (0,033)

N_foreignSH 0,013** 0,024** 0,023**

(0,006) (0,007) (0,007)

ln_ta 0,011 0,011 0,009 0,014* 0,009 0,011 0,015*

(0,008) (0,008) (0,008) (0,008) (0,008) (0,008) (0,008)

Industry Included Included Included Included Included Included Included

N 285 285 285 285 285 285 285

R-squared 0,1295 16,16 17,36 17,32 17,36 19,69 20,25

F 5,88 5,89 5,76 4,75 5,76 5,11 5,29

Prob>F 0,000 0,000 0,000 0,000 0,000 0,000 0,000 AR: Abnormal return D_Controlled ownership: dummy indicating whether the SH1>20% SH1: proportion of shares of the largest shareholder Inside_own: inside ownership N_SH: number of all significant shareholders N_non-fin: number of significant non-financial shareholders N_fin: number of significant financial shareholders N_Gov: number of governmental shareholders N_ForeignSH: total number of foreign shareholders Ln_ta: Ln (total assets)

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Table 5: Differences of means

Variable Disp Fam-con NF-con D-F F-NF D-NF

total 32,86 67,85 63,99 ** * **

sh1 10,48 40,65 42,25 ** **

Inside_own 3,40 26,63 8,75 ** ** **

N_foreignSH 1,79 1,15 0,75 ** * **

N_SH 4,40 4,61 3,06 ** **

N_non-fin 2,15 3,40 1,64 ** ** **

N_fin 2,17 1,21 1,20 ** **

N_Gov 0,08 0,00 0,22 ** ** **

Table 6: sectors versus ownership type NACE-1 digit Disp Fam-con NF-con Total Percent AR

1 5 23 0 28 9,24 0,002

2 36 13 30 79 26,07 -0,014

4 16 14 17 47 15,51 0,079

5 14 15 9 38 12,54 -0,032

6 10 4 7 21 6,93 -0,094

7 17 20 37 74 24,42 0,037

9 8 6 2 16 5,28 -0,213

Total 106 95 102 303 100 -0,004

Table 7: Size versus ownership type

Size Disp Fam-con NF-con Total AR

Q1 35 32 12 79 -0,051

Q2 29 18 25 72 -0,025

Q3 16 33 27 76 0,007

Q4 26 12 38 76 0,054

Total 106 95 102 303 -0,004

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M8 M9 M10

Dep var: AR

Intercept -0,434** -0,378** -0,372**

(0,112) (0,120) (0,120)

Disp 0,078** 0,087** 0,095**

(0,023) (0,027) (0,027)

Fam-con 0,056** 0,066**

(0,028) (0,031)

Fam-Founder 0,116**

(0,033)

Fam-NF 0,057

(0,037)

N_non-fin -0,007 -0,008

(0,007) (0,007)

N_Fin -0,025** -0,024**

(0,008) (0,008)

N_Gov -0,008 -0,005

(0,033) (0,033)

N_foreignSH 0,021** 0,021**

(0,007) (0,007)

ln_ta 0,012 0,013 0,014

(0,008) (0,008) (0,008)

Industry Included Included Included

N 285 285 285

R-squared 15,8 19,91 22,6

F 5,73 5,18 5,63

Prob>F 0,000 0,000 0,000 AR: Abnormal return Disp: dummy variable indicating whether SH1<20% Fam-Con: Dummy variable indicating whether the company is family controlled N_SH: number of all significant shareholders N_non-fin: number of significant non-financial shareholders N_fin: number of significant financial shareholders N_Gov: number of governmental shareholders N_ForeignSH: total number of foreign shareholders

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M11 M12 M13

Dep var: AR Disp Fam control NF control

Intercept -0,307* -0,270 -0,473

(0,167) (0,299) (0,374)

SH1 -0,005 0,002 0,003*

(0,004) (0,018) (0,002)

Inside_own 0,002 0,000 0,005**

(0,003) (0,001) (0,001)

N_non-fin -0,013 0,006 -0,024

(0,014) (0,012) (0,022)

N_Fin -0,046** 0,003 -0,020

(0,015) (0,015) (0,023)

N_Gov -0,020 0,013

(0,072) (0,059)

N_foreignSH 0,037** 0,002 0,035

(0,011) (0,012) (0,021)

ln_ta 0,021* -0,004 0,011

(0,012) (0,025) (0,021)

Industry Included Included Included

N 285 285 285

R-squared 20,6 37,16 35,91

F 1,84 3,84 3,5

Prob>F 0,048 0,000 0,000 AR: Abnormal return SH1: proportion of shares of the largest shareholder Inside_own: inside ownership N_SH: number of all significant shareholders N_non-fin: number of significant non-financial shareholders N_fin: number of significant financial shareholders N_Gov: number of governmental shareholders N_ForeignSH: total number of foreign shareholders

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