cross ownership and firm performance

Crossownership and

firmperformance

OctaviCastells,

Jaime Lopez,BereniceRamirez

Introduction

TheoreticalModel

MethodologyNetwork Analysis

Inferential Analysis

Data

Descriptiveanalysis

EmpiricalResultsRobustness check

Conclusions

Cross ownership and firm performance

Octavi Castells, Jaime Lopez, Berenice Ramirez

June 28, 2015

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Agenda

1 Introduction

2 Theoretical Model

3 MethodologyNetwork AnalysisInferential Analysis

4 Data

5 Descriptive analysis

6 Empirical ResultsRobustness check

7 Conclusions

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Introduction

Our paper assesses the impact of cross ownership on firmperformance and industry competition through an analysis ofshareholder’s networks in SpainWe focus on three specific sectors: Food, Pharmaceutical andEnergy, for which we show the evolution of cross ownershipconcentration from 2004 to 2012

Firm-level mark-ups as a measure of industry competitionMarket share as a measure of firm performance

The chief hypothesis we present is that more connected firmscoordinate their market strategies to compete less aggressivelyand perform better than their less connected rivals

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

IntroductionRelated literature

Our study relates to several papers, we will mention the mostimportant ones:

Bhattacharya and Graham (2009): They study the effectof institutional cross ownership and firm performance,measured by Tobin’s Q, in Finland. Concluding thatownership concentration does not affect firm performanceHe and Huang (2014): They asses how institutionalcross-ownership of same industry firms affects productmarket behaviour in they U.S. They results show thatcross-held firms experience a significantly higher marketshare growth than non-cross held firmsAzar, Schnalz and Tecu (2015): They examineinstitutional ownership on the U.S. airline industry, findingthat product prices are 3-11% higher because of commonownership

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Theoretical Model

Azar, Schmalz and Tecu (2015) shows the mechanismthrough which cross ownership affects the profitmaximization function of companiesDefine:

M: number of investors in the industryN: number of companies in the industryj : a given company in the industryβik : share of equity of investor i on firm kπi : profits of investor iπj : profits of company jxj : strategy of company j

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Theoretical Model

Investor i total profits from its portfolio of companies are:

πi =∑

kβikπk (1)

As firms aim to maximize shareholders’ value, then firm jmaximization function is:

maxxj

π̂j =M∑

i=1βij

N∑k=1

βikπk (2)

This can also be expressed in the following way:

maxxj

π̂j = πj +∑k 6=j

∑i βik∑i βij

πk (3)

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Theoretical Model

Therefore, companies maximize their own profit plus alinear combination of the profits of other companies whereits shareholders have equity stakes.

The expression∑

i βik∑i βij

represents the weight each companyputs in the profits of the rest of the firms in the industry,and thus, is a measure of the degree of connectivitybetween companies as a result of their cross ownership.

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions


We define two companies to be connected in the crossownership network if they have at least one investor with astake of equity above 1%Adjacency matrix: For every pair of firms, a value of ”1”represents a cross ownership connection, whereas a valueof ”0” represents no connectionNetwork Density: Measures the degree of connectivityamong industry firms through cross ownership. Calculatedas:

Density =∑k

i=1∑

j 6=i yijk(k−1)

2(4)

Connections generated by the largest shareholders: Wealso calculated the percentage of connections generated bythe major shareholders at each point in time, as a measureof ownership concentration

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

MethodologyInferential Analysis

We want to evaluate the effect of cross ownership onindustry competition and firm performanceMeasure of industry competition:

Markupi ,t = OperatingRevenuesi ,tOpertatingExpensesi ,t

(5)

Measure of firm performance:

MarketSharei , t = Salesi ,t∑ki=1 Salesi ,t

(6)

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

MethodologyInferential Analysis

OLS regressions1 Effect of cross ownership on markup:

Markupi ,t = α+βNconnectionsi ,t+γXi ,t+δZi , t+Firmi +εi ,t(7)

2 Effect of cross ownership on market share:

MarketSharei ,t = α+βNconnectionsi ,t+γXi ,t+δZi , t+Firmi +εi ,t(8)

Where:N connections: Main variable of interest. Measures thenumber of edges each company has with other industryfirms in the cross ownership network, normalized by thetotal number of companies in each period of timeX : Vector of industry time-varying characteristics,including Average Industry Markup and Network DensityZ : Vector of firm-specific control variables, which includeLeverage, Size, and Sales GrowthFirm: It captures firm fixed effects.

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Data

Two datasets:1 Accounting data from Spanish listed companies:

Obtained from Compustat GlobalRemoved companies from the Financial Services Industryand SICAVs

2 Ownership data:Obtained from Thomson Reuters institutional holdings

After merging both samples, we end up with 250,977observations for our network analysis, and 809 firm-quarterlyobservations for the regressions.We focus on companies belonging to the Food (SIC 20),Pharmaceutical (SIC 28), and Energy (SIC 49) industries.

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Descriptive analysisMajor shareholders

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Descriptive analysisDensity

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Descriptive analysisPercentage of connections

Figure: Percentage of connections generated by the largestshareholders at 1% threshold

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Descriptive analysisNetwork: Energy sector

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Empirical Results

Azar (2012) found a positive and significant effect ofIndustry Network Density on Average Industry MarkupsHe and Huang (2014) found a positive and significanteffect of different measures of Cross Ownership on MarketShare Growth

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Empirical ResultsRobustness check

Crossownership and

firmperformance

OctaviCastells,


Introduction

TheoreticalModel



Data

Descriptiveanalysis


Conclusions

Conclusions

Moderate increase of Cross Ownership Network Densityfrom 2004 to 2012.Importance of largest shareholders on Network Densityvaries a lot over time, as compared with the U.S. (Azar,2012)Companies that share investors with high stakes in theirequity have higher markups, providing evidence of collusivebehaviour among natural competitorsFurther research should be conducted (specially inEuropean countries) in order to provide regulators with abetter perspective about the implications that increasingcross ownership can have in market competition and, inthe end, in final consumers.

cross ownership and firm performance

Economy & Finance