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