The Duration of Equity Ownership at the Oslo Stock Exchange 1989-1999
The Duration of Equity Ownership at the Oslo Stock Exchange 1989-1999
Øyvind Bøhren, Richard Priestley and Bernt Arne Ødegaard, Norwegian School of Management BI
This report is part of the The Corporate Governance Program at the Norwegian
School of Management. This program has two overall objectives. The first is to
construct a high-quality data base on a wide set of corporate governance
characteristics for Norwegian firms. The second objective is to empirically
explore the determinants of a firm's corporate governance characteristics and
the relationship between such governance characteristics and the firm's behavior
as an economic entity. The Corporate Governance Program, which consists of a
series of individual projects, has been sponsored by the Norwegian School of
Management and the Research Council of Norway over the period 2003--2005.
The project on ownership duration
This project asks whether the length of the holding period (ownership duration)
of large stockholders influences the behavior and economic performance of
firms. This question is often raised in the public debate. Almost without
exception, the commentators praise the patient investor and argue that because
too many owners are short--term, the macro economy suffers. The problem is,
however, that to the best of our knowledge, there does not exist any reliable
theoretical or empirical justification for making such strong normative
statements about corporate governance design. In fact, this phenomenon has
received very limited attention in the research community.
The reason the issue of ownership duration is unexplored empirically is probably
due to the lack of time series data on corporate governance mechanisms. Our
project utilizes a rather unique time series of ownership structure data over
the period 1989--1999 to describe the anatomy of ownership duration. When doing
this, we consider ownership duration a corporate governance mechanism, i.e., a
tool owners can use to influence the firm's behavior in their preferred
direction. For instance, we describe the empirical frequency distribution of
ownership duration for large owners and explore how it relates to owner
characteristics like investor type and firm characteristics like firm size. We
also analyze the relationship between ownership duration and the firm's ability
to create value, while controlling for other determinants of economic
performance.
Major findings
Analyzing all non-financial firms listed at the Oslo Stock Exchange over the
period 1989-1999, we find that a firm's largest owner keeps that position for
less than three years on average. The typical ownership duration lasts longer
the larger the stake and is longer for national as opposed to international
investors. Individual owners and industrial owners have longer duration than
financial institutions and foreigners. Firms investing in short-term projects
have more short-term owners, supporting the idea that project duration matches
with ownership duration. That is, firms with long-term (short-term) investment
projects tend to have long-term (short-term) owners. We also estimate the full
frequency distribution of ownership duration, adjusting for truncation bias.
This bias occurs because we do not know the true entering (termination) year of
owners observed in the first (last) year of the sample period. Based on this
frequency distribution, we find that the exit probabilities are duration
dependent. That is, the owner's decision to stay on or leave in a given year
depends on how long the owner has stayed so far. Most owners leave within two
years, whereas those who pass the three year hurdle are less likely to leave the
longer they have stayed already. Thus, large owners tend to be either stay in
the firms either for a quite short or a quite long period of time.
We find that when we do not distinguish between owner types, ownership duration
and firm performance are always negatively related. This pattern is consistent
with the notion that long-term owners are sleepy monitors and with the often
heard claim that owners and analysts push managers into myopic behavior at the
expense of long-run value maximization. Interestingly, when we examine the
relationship between performance and the holdings of specific owner types, we
find that the negative relation between long-term ownership and performance is
due to financial institutions and industrial firms, which both represent
indirect ownership (delegated monitoring). This is consistent with the notion
that these owner types have weak monitoring incentives and allow managers to
destroy value. To the extent that financial institutions also emphasize reported
short-term earnings more than others, this could be an additional reason why
firms influenced by such owners over extended periods perform more poorly than
others, including firms with industrial owners. In contrast, we show that longer
ownership by individuals has a moderately positive relation to performance.
It has become quite popular to argue that owners are too impatient, and that the
owners' tendency to vote with their feet forces management to overinvest in
projects with short payback in order to keep current earnings high. Similarly,
owners are accused of being restless, lacking the commitment, competence and
persistence needed to monitor and support the management team as an integral
part of good corporate governance. According to this view, short-term investors
are bad owners, long-term ones are good, and economic welfare is thought to
suffer because ownership duration is too short. Our results suggest that
conventional wisdom is inconsistent with reality on most of these issues, and
particularly that the unconditional praise of the long-term owner is misplaced.
The structure of the report
The first chapter contains the academic paper, which is also published
separately. This paper rests on a comprehensive set of underlying analyses and
discussions which are documented in the remaining chapters of this
report. Chapter 2 is a short introduction to the problems facing a researcher
looking for suitable measures of ownership duration. This chapter also defines
six alternative ownership duration measures and four alternative ways of
restricting the relevant sample of firms Chapter 3 describes our sample of firms
and summarizes various characteristics of these firms except their ownership
duration, such as ownership concentration, equity holdings by officers and
directors (insiders), firms size, project duration, and economic
performance. Chapter 4 describes ownership duration in various ways, such as the
correlation between the duration measures, the stability of the measures over
time, and how mean and median duration varies across firm types, firm size, and
owner type. Chapter 5 considers the determinants of duration, i.e., the
characteristics of the firm and its owners which jointly make an owner be
long-term vs. short-term. On this background, we address the relationship
between ownership duration and economic performance in chapter 6. Whereas this
chapter is concerned with correlation rather than the much more difficult
question of causation, chapter 7 takes one step further by addressing potential
reverse causation: Is ownership duration driven by performance rather than the
other way around? Finally, chapter 8 compares our approach to an alternative
method based on so called relationship investors. This framework has recently
been used by Bhagat, Black and Blair (2004) to analyze ownership duration in the
US. An appendix describes the data sources and defines the variables used in the
report.
The report is found as a
pdf (Adobe acrobat) file