I Heard it through the Grapevine: Market Control of Controlling Family Shareholders

• DOI: http://doi.org/10.1111/corg.12124
• Date: 01 November 2015
• Author: Ulf Larsson‐Olaison,Andreas Jansson
• Published date: 01 November 2015

I Heard it through the Grapevine: Market Control

of Controlling Family Shareholders

Andreas Jansson*and Ulf Larsson-Olaison

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This paper addresses the issue of whether controlling family shareholders are exposed to market

control. The paper advances the theory that the expected performance of controlling shareholders, inferred from their track

records, is constantly reflected in the market value of controlled firms.

ResearchFindings/Insights: By using event-studymethodology, we show thatunexpected acts that are detrimentalto minority

shareholder interests performed by controlling family shareholders lead to short-termnegative abnormal returns in firms that

otherwise are completely unaffected by the detrimental acts, but are controlled by the same family-based business group.

Theoretical/Academic Implications: The results shed new light on the significance of track records in corporate governance

that have implications for research on informal corporate governance mechanisms, governance of family firms, and, possibly,

comparative corporate governance. The results also have tentative implications for the understanding of the function of

family-controlled business groups consisting of industrially unrelated firms by suggesting a function that has heretofore been

neglected.

Practitioner/Pol icy Implications: The results have implications for reform work in corporate governance by showing that

practitioners and regulators must consider variability in non-legal corporate governance mechanisms when analyzing and

attempting to change different nationalcorporate governance systems to achieve desired effects.

Keywords: Corporate Governance, Business Groups, Family Ownership, Minority Shareholders

INTRODUCTION

Controlling family shareholders that dominate the owner-

ship structures of listed firms are a pervasive feature in

most corporate governance systems outside the Anglo-

American sphere (La Porta, Lopez-de-Silanes, & Shleifer,

1999). Often these families control multiple, industrially

unrelated firms organized as business groups (BGs) (Almeida

& Wolfenzon, 2006; Khanna & Yafeh, 2007; Luo & Chung,

2005). Collin defines such BGs as ‘supra-organization[s]

consisting of legally independent firms joined together by

some mechanism, particularly by equity ownership, and

co-ordinating the use of one or more resources’(1998: 719).

This paper addresses the issue of whether controlling family

shareholders in Swedish BGs are exposed to market control.

The potentially detrimental effect of concentrated

ownership in terms of minority expropriation has been a

central topic in corporate governance research for almost

two decades (e.g., Dyck & Zingales, 2004; Nenova, 2003).

The Swedish corporate governance system, in which our

empirical study is situated, is characterized by concentrated

ownership. In about two-thirds of the listed firms, a single

shareholder holds more than 20 percent of the votes (Fristedt

& Sundqvist, 2009). These controlling shareholders use dual

class shares, pyramid structures, cross-holding, voting caps,

and/or combinations of these (Agnblad, Berglöf, Högfeldt,

& Svencar, 2001) to maintain control of the firms. In compara-

tive corporate governance research, it is often claimed that

these structures distort control from capital and are thus

considered to be signals of minority shareholder expropria-

tion (e.g., Bebchuk, Kraakman, & Triantis, 2000; Grossman &

Hart, 1988). BGs are also a prevalent feature of Swedish

corporate governance, and it has been suggestedthat Swedish

BGs are associated with power entrenchment and, from a

minority shareholder perspective, less than optimal

investment strategies (Holmén & Högfeldt, 2004). As Siegel

and Choudhury (2012) suggest is valid more generally,

however, outrighttunneling seems not to be an issue of impor-

tance in these BGs, but what minority expropriation there is,

appear to take on such less drastic forms. However, this has

not scared off external equity providers. Foreign ownership

in the firms listed on the Stockholm Stock Exchange is very

high, varying between 30 and 40 percent during the last

decade (Statistics Sweden, 2010). The Swedish stock market

*Address for correspondence: Andreas Jansson, School of Business and Economics,

Linnaeus University, S-351 95 Växjö, Sweden. Tel: +46 (0)470 708 230; Fax: +46 (0)470

824 78; E-mail:andreas.jansson@lnu.se

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12124

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Corporate Governance: An International Review, 2015, 23(6): 504–518