Ownership concentration, firm valuation, and earnings management: an international study

Abstract

The first study examines ownership concentration in the US and in 40 other countries. The recent study by Holderness (2009) challenges the widely belief and earlier findings (e.g. La Porta et al. (1998, 1999) and shows that the ownership of US firms is at least as concentrated as that of elsewhere. These findings raise fundamental questions regarding US ownership structure and the relation between ownership concentration and investor protection. Using a comprehensive international sample across 41 countries, this study re-examines the ownership concentration between US firms and non US firms. This study also extends the method of Holderness (2009) by examining at different cutoffs and controlling for country heterogeneity, and thus we find that US firms are more diffuse than non US firms. This paper also confirms that investor protection reduces ownership concentration cross countries. The second study examines the relationship between blockholdings and firm value and how this relationship changes across investor protection regimes for 20883 observations in 37 countries from 2006 to 2009. This study finds a U shaped relationship between firm value and the control rights of blockholdings. The U shaped relationship provides evidence that supports the entrenchment effect when the control rights of blockholdings are not sufficiently high. In addition, this study finds that the relation between blockholdings, firm value, and investor protection is not monotonic. The final study investigates the earnings management of firms that have different types of ultimate owners and how the earnings management of these firm groups responds to investor protection in 36 countries. Similar to other studies, I find that the earnings management of firms having ultimate owner is higher than that in widely held firms. However, I find this relationship does not hold for all firm groups having different types of ultimate owners. Furthermore, whereas other studies find that insiders are associated with greater earnings management in low investor protection countries than those in high investor protection countries, this study finds the opposite pattern for some firm groups. These findings contribute to the literature by examining the heterogeneity of blockholders, accounting reports, and investor protection.