FAMILY OWNERS Krivogorsky2012

JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH American Accounting Association
Vol. 11, No. 1 DOI: 10.2308/jiar-10214

2012
pp. 191–221
Dominant Owners and Performance of

Continental European Firms
Victoria Krivogorsky and F. Greg Burton
ABSTRACT: We examine dominant ownership in Continental European firms to further
refine the distinction between the ability to control and actual control and whether a
particular distinct shareholder ownership type is associated with company performance.
In addition, we empirically test whether the economic performance of the firms from
different countries is consistently affected by the nature of the company’s dominant
owner. After disaggregating the overall sample by specific ownership type and by
country, we find a positive relationship between dominant ownership and performance
for firms in which banks and families/individuals are the dominant owners and a negative
relationship when corporations are the dominant owners. Additional analysis discloses
an even more complicated picture, suggesting that countries are not homogenous in
terms of their ownership landscapes and, hence, their effects on performance.
Keywords: accounting performance returns; corporate governance; dominant
ownership; voting rights; cash ﬂow rights; regulatory environments.
I. INTRODUCTION
C
ompanies use capital markets to transform themselves from privately owned entities into
public companies to reap the benefits of scale and scope (Chandler 1990). However, within
the benefits of scale and scope, the ownership structure of publicly traded companies can
differ significantly. For instance, the corporate ownership landscape in Continental Europe is
commonly populated by organizations wherein one or a small group of owners holds the largest
number of shares (dominant ownership). It is assumed that dominant ownership leads to control of
the company (Gugler et al. 2003; Thomsen et al. 2006). However, the notion of control has various
meanings. One of the key elements in the debate on the meaning of control is the distinction
between exercising actual control and the capacity (ability) to control, which does not require the
holder to actually exercise control.
Victoria Krivogorsky is an Associate Professor at San Diego State University, and F. Greg Burton is an
Associate Professor at Brigham Young University.
We are grateful to Pascale Delvaille, Paul Andre, Daphne Lui, Ken Ferris, participants of the workshop in ESSEC-Paris,
participants of 2008 American Accounting Association Annual Meeting, and three anonymous referees of the 2009
Academy of International Business Annual Meeting for their helpful comments. We particularly thank Wendy Wilson
for her insightful comments and suggestions. We thank Anton Leonov, Shreays Bhatt, and Tracy Piper for invaluable
research assistance. We also gratefully acknowledge financial support from CIBER SDSU and ESSEC, Paris, France.
Any errors are our own.
Published Online: January 2012
191
192 Krivogorsky and Burton
The distinction between the capacity to control and actual control has become more important
in Continental Europe since the European Union (EU) began promoting increased shareholding. As
a result, countries in Continental Europe began regulatory reformations1 intended to transform the
relational investor-based markets into markets similar to those found in the United States. The
intent is to create a competitive market environment in EU countries where firm ownership can be
easily and actively traded. As a result, the nature of traditional economic structures (e.g.,
bank-oriented in Germany and Austria; state-oriented in France and Spain) has undergone
significant transformation (although not uniformly across all EU member states).
For a variety of reasons, the shareholder that has the power to govern, or the capacity to
control, may delegate the control function and not actively manage the controlled entity. It is
possible that passive management or management through agents produces different financial
results than active, hands-on management. Therefore, the decision an owner makes to exercise or
not exercise control affects agency costs and impacts the firm’s performance. Whether dominant
ownership type produces different financial results is important information for potential investors,
particularly given the emphasis that the EU is placing on increasing shareholdings.
The objective of this paper is to investigate (1) whether different types of dominant owners,
which have the capacity to control, exercise active control; (2) whether the type of dominant
ownership affects a firm’s performance; and (3) whether there is a country effect on dominant
owners and the performance of their companies. After controlling for firm size, industry sector, and
country-specific factors, we test the relationship between three performance measures (return on
assets, return on shareholders’ funds, and market-to-book value of equity) and the type of dominant
ownership during the fiscal years 2005–2007. We find no statistical support for any relationship
between ownership concentration and any of the performance measures in the overall sample.
However, when we disaggregate the overall sample by specific ownership type, we find statistical
support for a relationship between ownership and performance for firms where blocks (nonfinancial
firms), banks, and families/individuals are the dominant owners. Further, we find that family/
individual or bank dominant owners actively exercise control and that the relationships between
these two types of dominant ownership and returns are strongly positive. This finding supports the
claim that families/individuals and banks have the capacity to control and are likely to exercise
actual control. Family/individual or bank dominant owners tend to monitor their managers more
effectively or to manage a firm themselves due to their direct involvement and lower information
costs. Prior research suggests that active involvement of this type of owner serves as a key restraint
on the behavior of public corporation managers and thereby reduces agency problems (Gilson 2005;
Kirchmaier and Grant 2006). Interestingly, we also find that robust investor protection laws have a
strong statistically negative impact on performance in all subsamples, suggesting that a strong
regulatory environment is incongruent with the dominant owners’ incentives/actions limiting their
monitoring activities.
To further validate our results, we test the relationship between the performance measures and
dominant ownership on a country-by-country basis. The results of these tests suggest that even
though all countries in our sample belong to the same economic union and use the same accounting
1
In March 2006, the European Parliament agreed upon the first reading on the Commission’s proposal for
Directive IP/04/1334, which meant to make it easier for public companies across the EU to take certain measures
affecting the size, structure, and ownership of their capital. This proposed directive amended the parts of the
1976 Second Company Law Directive covering the formation, maintenance, and alteration of capital. The
purpose of the legislation is to reform European markets so that Continental European firms can reap the benefits
of operating in an expanded area that has similar labor law without concern for borders or currency issues. The
reform gives investors more incentives and access to EU capital markets. The proposal resulted in passing
Directive 2007/36/EC of the European Parliament and of the Council on the exercise of certain rights of
shareholders in listed companies.
Journal of International Accounting Research

Volume 11, No. 1, 2012
Dominant Owners and Performance of Continental European Firms 193
standards, the strength and the direction of these relationships vary from country to country.
Contrary to what prior research suggests, bank’s equity holdings in Germany are lower than
expected, yet have a significant effect on the performance of firms. We believe that this is a result of
the German government’s latest efforts to change the regulatory environment to stimulate the
reconstruction of the German economy to be more market centered. Also, family/individual
ownership in Portugal is strongly and inversely correlated with return on assets and return on
shareholders’ funds. Closer inspection of the family/individual-owned firms in Portugal reveals that
the ownership concentration in this subsample is lower than in other countries (36 percent). At this
level of ownership, as Hubbard and Love (2000) suggest, the private benefits of control likely
exceed the costs of close monitoring.
Another interesting result offers marginal statistical support that institutions in Spain, unlike in
any other country in our sample, provide efficient monitoring of companies. The analyses reported
by López-Iturriaga (2003) and Kirchmaier and Grant (2006) suggest that this observation may be
due to a significant number of firms changing from being state-owned to being owned by an
institution. Although the Spanish Privatization Plan of 1996 has changed the Spanish ownership
landscape, the financial system in Spain remains heavily dependent on credit (Glen and Singh
2005). This dependency results in investment funds becoming not just owners but also major
capital providers, interested in monitoring both returns on assets and shareholders’ funds.
The remainder of this paper is organized as follows. Section II discusses dominant ownership
and the role of the controlling owner as an alternative to environments where shareholdings are
widely held and ownership is dispersed. Section III of the paper develops the research hypotheses,
and Section IV defines the variables we employ. Section V of the paper describes our data, and
Section VI reports the results. Finally, in Section VII we discuss our findings.
II. THE DOMINANT OWNER AND AGENCY ISSUES

The stewardship theory suggests that the existence of concentrated ownership (a controlling or
dominant shareholder) restrains public corporation managers’ behavior. The theory reasons that
because controlling shareholders own large equity stakes for extended periods of time, they are
likely to have a greater incentive either to monitor managers effectively or to manage the company
itself (Thomsen 2004; Hopt 2006). Increased owner proximity reduces information asymmetry and
controls agency problems (Jensen 1986; Shleifer and Vishny 1986). The literature contends that
there is a tradeoff between optimal risk diversification obtained under a fully dispersed ownership
structure and optimal monitoring incentives, which require concentrated ownership. Gugler et al.
(2003) show that risk-averse entrepreneurs going public signals firm quality and a commitment to
good management when they retain a large stake in their firms. Conac et al. (2007) demonstrate
that, in general, risk-averse concentrated owners tend to diversify their holdings, which results in
less monitoring and control. Studies of Continental Europe concentrated owners show that
ownership remains stable over long periods of time, which creates greater monitoring incentives for
the largest owner (Gugler et al. 2003; Gilson 2005; Ehrhardt and Nowak 2003).
The ability of concentrated shareholders to monitor managers is not, however, without its own
potential problems. These potential problems stem from a concentrated owner’s ability to extract
private benefits using a degree of the capacity to control. Also, the less equity the largest
shareholder has, the greater the incentive to use that control to extract private benefits. Johnson et al.
(2000) refer to this as ‘‘tunneling,’’ defined as any kind of action taken to transfer resources from the
firm to the controlling owner. Thus, while increased productivity might accrue to shareholders in
proportion to their equity, the private benefits of control are allocated based on the relative share of
the governance power (Hubbard and Love 2000).

Volume 11, No. 1, 2012
Dominant Ownership
The dominant owner concept embraces the accounting and finance literature on the congruence
of voting and cash flow rights and European laws impacting these rights. Dominant ownership can
create problems for other investors. For instance, the European Commission, in its document,
‘‘Proportionality between Ownership and Control in EU Listed Companies: External Study
Commissioned by the European Commission,’’ recognizes that inconsistencies between cash flow
rights and controls rights create numerous challenges for the shareholders because concentrated
owners use a variety of available legal mechanisms (e.g., non-voting stock, trust company
certificates, voting rights restrictions) to retain or lock-in control of these firms (Institutional
Shareholder Services 2007). To mitigate some of the potential problems, concentrated ownership in
Continental European companies is governed by takeover regulations, which have different national
control thresholds as well as mandatory bid levels. The EU’s directive on controlling shareholdings
defines the controlling owner of an entity as the one who has the ‘‘capacity to control,’’ i.e., controls
an absolute majority (over 50 percent) of the voting rights, or holds enough voting rights to have de
facto control. The de facto control threshold in Continental Europe is defined by national
regulations and varies from country to country.2
To overcome the lack of conformity of reporting regulations among the Continental Europe
countries in our sample, we develop the notion of ‘‘dominant owner’’ rooted in the behavioral
theory of the firm (Demsetz 1995) by assuming that in a stable economic environment, every
dominant owner (an organization, family, or group of individuals) is a homogenous unit with a set
of similar goals, more or less constant over an extended period of time. This assumption is
supported by research that shows the long-term stability of the concentrated owner-company
relationship in Continental Europe (Gilson 2005; Ehrhardt and Nowak 2003; Gugler et al. 2003).
Given the diversity in Continental Europe country reporting and de facto control thresholds, a
shareholder must meet three conditions to be categorized as a dominant owner in our analysis. First,
a shareholder has to be a firm’s dominant owner for at least three years prior to the years under
investigation. Second, the dominant owner has to singly hold the largest stake of voting shares and
have no less than 25 percent ownership (which represents the lowest common denominator among
the de facto control thresholds established in Continental Europe national regulations and the
ultimate ‘‘control’’ criterion recognized in the EU). Third, to address the discrepancy between cash
flow ownership and control ownership in Continental Europe, we define the dominant owner of the
firm as the owner who also owns a majority of the total shares (along with the majority of voting
shares) with no other shareholder owning a block in the firm of equal size. By requiring these three
conditions, dominant ownership represents both cash flow rights and control rights for the first-
order relationship between the owner and a firm, thereby giving the dominant owner not only the
capacity to control the firm, but also an incentive to exercise active control to affect the firm’s value.
We adopt dominant ownership as a measure of an owner’s governance power so as to establish
a direct and non-spurious correlation between the interests and actions of different types of
dominant owners and their respective firms in different national environments.
2
For example, in France, de facto control begins at 40 percent, whereas the mandatory bid threshold begins at
33.3 percent. In Germany, the de facto control threshold begins at 25 percent, and the mandatory bid threshold
established by the German Takeover Code of 2002 is 30 percent. The de facto control threshold under the
Belgian Companies Act begins at 25 percent, and the bid threshold at 20 percent of the share capital. Finally, in
Spain, the mandatory bid threshold is a moving target, with several criteria attached to it.

Volume 11, No. 1, 2012
III. HYPOTHESES DEVELOPMENT

In this section, we present our hypotheses concerning the relationship between dominant
ownership and performance. We develop hypotheses around the notion that the dominant owner has
incentives to exercise active control over the entity. These incentives have important implications
for the strategy of a firm and its performance.
Ownership Structure
Trading markets in the countries where concentrated ownership is higher tend to be less active
and less transparent than markets in countries where dispersed ownership is predominant. Less
active and less transparent markets restrict a firm’s financing alternatives. Prior research suggests
that this restriction impacts a dominant owner’s utility function and, in turn, firm performance
(Thomsen and Pedersen 2000, 2003). This literature also argues that information asymmetry is
reduced when concentrated ownership is held by one or a coalesced small number of investors
because their intervention is less expensive, they can react sooner, and they have the capacity to
control. In contrast to prior research, we suggest that the capacity to control does not always result
in actual control and that a concentrated owner has increased incentives to monitor if the
concentrated owner has long-term tenure with the firm and the majority of cash flow rights.
However, as pointed out earlier, concentrated ownership is not an unmitigated blessing. Although
closer scrutiny reduces information asymmetry, it may result in loss of critical objectivity.
Dominant investors tend to have a strong self-interest to control the firm, which can lead to over-
monitoring and ex post opportunism (Burkart et al. 1998).
Family/individual and bank dominant owners are more directly involved in company
monitoring with long, well-established relationships between the principal and the company than
are other types of owners. In contrast, if the dominant owner is a business entity, because it is itself
managed by agents who face their own agency costs, the value of the stake of the business in the
portfolio firm may not be maximized (Black 1990; Coffee 1991; Black and Coffee 1994).
Furthermore, the managers of the firm-owner very often join forces with the managers of the owned
company in the decision against making costly firm-specific investments, which ultimately can have
a negative effect on profitability. The level of interest in monitoring is contingent on whether the
dominant shareholder is also a creditor of the company. In this case, the creditor/shareholder is
interested in both passive (credit) and active (equity) investments in a company.
Given the advantages and disadvantages accruing to a firm because its ownership is
concentrated, we suggest the following hypothesis, stated in the alternative form:
H1: The level of dominant ownership of a firm correlates with its performance.
To validate the results of the tests performed for the whole sample, we also took into account
the existing contextual diversities in the various nations by including country specific risks into our
regression3 as well as the dominant owner’s identity, which defines the dominant owner’s
incentives to control.
Owner Identify and Preferences

The usual assumption in economics and accounting research is that the principal’s overriding
goal is to maximize profits and shareholder value of a firm. We use the different ownership types
described by Thomsen and Pedersen (2000) and Kirchmaier and Grant (2006) to identify the types
3
This factor is designed to further distinguish developed EU countries that have common economic conditions.

Volume 11, No. 1, 2012
of owners that reportedly have different incentives to monitor. These incentives have important
implications for the strategy of a firm and its performance. We posit that failing to incorporate the
incentives of different types of owners and to account for the discrepancy between cash flow and
control rights has produced ambiguous findings about the relationship between firm ownership
concentration and performance. While control concentration is related to the power of owners to
influence their managers’ behavior, the most important factors in determining outcomes from the
exercise of that power may well be the identity of the dominant owner. Thus, building on the work
of Thomsen and Pedersen (2000), Demsetz and Villalonga (2001), and Kirchmaier and Grant
(2006), we allow for four types of dominant owners:4 institutions (financial intermediaries other
than banks), blocks (non-financial companies), families/ individuals, and banks.5 A discussion of
each type of dominant owner follows.
Institutional Ownership
Institutional dominant owners tend to place more emphasis on portfolio investment returns and
lack interest in directly influencing or controlling management (McConnell and Servaes 1990;
Nickel et al. 1997; Thomsen and Pedersen 2000). Because institutional performance is judged by its
financial success, institutional ownership is aligned with shareholder value and liquidity, and
accompanied by weak shareholder activism (i.e., unwillingness to exert effort to directly influence
or control management of a firm). Dominant institutional ownership gives rise to the following
hypothesis stated in the alternative form:
H2: The level of dominant institution ownership of a firm correlates with its performance.
Block Ownership
Block or industrial corporate ownership is common for Continental European firms. There are
some advantages to this type of ownership. Corporate ownership ties between many investees,
particularly those within the same industry, facilitate knowledge transfers (Thomsen 2004). Also,
when a block controls a number of firms, the block may pool resources from all the firms and
allocate them to the needs of individual firms in the group. Vertical ties between firms at points in
the value chain make sense under conditions of high asset specificity and frequent transactions
(Williamson 1985). For example, by following certain transfer pricing policies, the tax burden of a
firm in a group can be eased. However, while this kind of action may serve a legitimate business
purpose for a group of firms, it also provides the possibilities for expropriation of the minority
shareholder by the dominant shareholder (Conac et al. 2007; Renneboog 2000). Additionally,
Kester (1992) points out that block ownership comes with the cost of the loss of flexibility and the
risk of deficient monitoring. The above arguments support the following hypothesis:
H3: The level of dominant block ownership of a firm correlates with its performance.
4
Initially, we included a fifth category for state ownership. Due to the scarcity of firms in our sample in which the
state or government could be identified as dominant owner (eight in total), this category was dropped from
further analysis.
5
The determination of dominant ownership groups is based on how they are reported in the Amadeus database.
Institutions consist of insurance companies, foundation/research institutes, financial companies, mutual and
pension funds/trusts/nominees. Industrial companies are considered to be block owners, and only companies
classified as banks in the database are used in the bank category. Families and individuals are identified as such
in Amadeus. We attempted to identify and classify all unnamed shareholders. Any unidentified unnamed
shareholders were excluded.

Volume 11, No. 1, 2012
Family/Individual Ownership
Family/individual ownership often manifests itself in the double role of members of a family or
individuals being both owners and managers of a firm. Goergen (2007) found that individuals and
members of a family are often reluctant to give up control because they choose to make human
capital investments in the firm. Also, if the family or individual owners are relatively wealthy, these
facets may cause the firm to have a long-term focus on risk aversion and survival (Fernández and
Nieto 2006). Furthermore, family and individual owners may derive private benefits (i.e.,
expropriation) from running the firm, which can come at the expense of the minority investor (Fama
and Jensen 1985).
Some scholars (Goergen 2007; Correlia da Silva et al. 2004) suggest that given the size of a
family’s or individual’s investment in a company, it is in their best interest to monitor a firm’s
managers and make sure they perform well. Because the family/individual focus in both owning
and managing a firm is on long-term survival, risk aversion, and expropriation, we hypothesize that:
H4: The level of dominant family/individual ownership of a firm correlates with its
performance.
Bank Ownership
Bank ownership plays an important ownership role in Continental European countries.
Historically, the so-called German ‘‘Hausbanks’’ provide a host of financial services to firms in
which they hold substantial investments. In these situations, internalized banking relationships
result with the bank-owned firm gaining special access to capital, information, and services.
The theoretical literature on bank monitoring shows that delegated monitoring by banks can be
an efficient form of corporate governance by offering a way of resolving collective action problems
among multiple investors. The effectiveness of bank monitoring, however, depends on the incentives
of bank managers to engage in the monitoring process. These incentives are, in turn, driven by factors
including the size of a bank’s interest in a firm, the level of a bank’s involvement in the company’s
governance (board of directors), and the state of the banking industry as measured by its size across
countries. Cable (1985) finds a positive performance effect on West German firms owned by banks,
and Ramirez (1995) identifies bank-owned firms as being less likely to be credit rationed (see also
Thomsen and Pedersen 2000). Accordingly, we propose the following hypothesis:
H5: The level of dominant bank ownership of a firm correlates with its performance.
Our hypothesized performance effect of dominant ownership concentration is subject to the
critique leveled by Demsetz (1983) who argues that ownership of a firm is an endogenous variable.
For example, if a firm performs poorly, a reasonable expectation might be that the firm’s dominant
owner will change. As a consequence, econometric analysis suffers from reverse causality when
endogenous variables are perceived to be exogenous. We believe that empirical evidence on the
stability of ownership in Continental Europe from Thomsen and Pedersen (2000), Ehrhardt and
Nowak (2003), Goergen and Renneboog (2003), and Kirchmaier and Grant (2006) runs counter to
the endogeneity argument of Demsetz (1983). These studies find that while shares of poorly
performing companies may trade frequently, it is rare that the dominant owner changes. Also, as
discussed earlier, Continental European countries have mandatory bid regulations encouraging the
stability and accumulation of control by the concentrated owner and even rewarding the loyalty of
shareholders by increasing their voting power (for example, France). Further, Ehrhardt and Nowak
(2003) indicate that the dominant owner of a firm chooses the ownership structure so as to
maximize a firm’s value from the owner’s perspective. The exogeneity of the relationship between

Volume 11, No. 1, 2012
ownership and performance in Continental Europe has also been supported in studies by Gugler et
al. (2003) and Gilson (2005).
To determine the stability in ownership for our sample, we compared the identity and
ownership stake of the dominant owner in the years 2002 and 2005. We found that ownership
stakes changed in less than 1 percent of our sample (including change in dominant owner of a firm
from one type to another).6 Based on the stability of the ownership in our sample, we postulate that
dominant owners have an opportunity to decide the nature and amounts of investment rather than
the efficiency of investments determining the identity of dominant owners.
Even though all companies in our sample are members of the European Union and use the
same accounting standards, we expect that there will be differences in the type of dominant owners
and firm performance between countries. Some of differences can be attributed to a country’s
specific regulatory environment. Other differences will arise because of historical ownership
patterns and traditions. For instance, prior research suggests that German banks will have large
equity holdings and exert a significant effect on the performance of German firms. We expect that
family/individual ownership will represent the most concentrated type of ownership in most
countries and that this type of ownership will be associated with the most powerful means of
control.
IV. VARIABLES IN THE MODEL

To test our hypotheses, we draw on three sets of variables. The first set of variables represents
the degree of ownership concentration overall for each of our defined dominant and concentrated
ownership types. The second set of variables is comprised of accounting-based performance
measures. Finally, the third set of variables is intended to control for national, institutional, size, and
industry affects.
Ownership Concentration
We classified dominant ownership of companies in our analysis into one of the four categories
previously discussed (institution, block, family/individual, or bank). To be included in our analysis,
we required a dominant owner to hold no less than 25 percent of common voting shares in a
company and a concentrated owner to hold no less than 5 percent of common voting equity in a
company. We exclude from the analysis firms without an identifiable dominant owner or cross-
shareholdings, such as partnerships limited by shares (common in France and Germany).7 To
control for the potential impact of other significant (concentrated) shareholders on a company’s
performance, we also include concentrated owners who have more than 5 percent but less than 25
percent ownership in our regressions.
To address the possibility of measurement error with respect to the independent variables, we
checked for potential lack of proportionality in voting and cash flow rights. In the few cases where
divergence in proportionality existed, we adjusted the dominant owner percent. For example, non-
voting shares provide special cash flow rights to shareholders to compensate for the absence of
voting rights. In cases where the lack of voting rights was coded into the database that we used
(Amadeus) as having zero ownership, we corrected for the divergence from proportionality. We do
this to ensure that the third condition we impose, categorized as a ‘‘dominant owner,’’ is being met
6
Because of the small percent of ownership changes, we are confident in assuming that endogeneity is not an issue
for our sample firms.
7
These partnerships function with small numbers of unlimited liability partners exerting control, while outside
shareholders provide most of the capital with little control attached.

Volume 11, No. 1, 2012
and that the dominant owner owns a majority of the total shares along with the majority of voting
shares.
Performance Measures
We selected as the dependent variables in our analysis two accounting-based performance
measures and a firm value measure: return on assets (ROA), return on shareholders’ funds (ROSF),
and market-to-book value of equity (MTB). Accounting performance measures are used because the
book value of balance sheet items is more value-relevant than earnings in Continental Europe and
the efficiency of funds employment is particularly important for credit institutions (Black and White
2003). Return on assets measures a company’s earnings in relation to the operating resources it has
at its disposal. It is calculated as earnings before depreciation, interest, and taxes divided by book
value of operating assets. Return on shareholders’ funds shows the overall efficiency of the firm in
employing ordinary shareholders’ resources. It is calculated as earnings divided by the share capital
and reserves. Market-to-book value of equity is calculated as the market value of stock, plus the
estimated market value of preferred stock, plus the book value of total liabilities, divided by book
value of total assets.
The use of accounting-based financial ratios has certain advantages and limitations over market
measures. One advantage is that accounting-based performance measures are not affected by
‘‘market moods.’’ Another advantage is that they do not suffer from an anticipation problem
because the accounting performance measures for one year reflect only the performance for that
year, and hence, the effect on the relationship between the profitability and corporate governance
mechanisms of another year is reduced.
Among the limitations of accounting-based performance measures is the fact that total assets
on a firm’s balance sheet are recorded at historical cost, while income is recorded at current
currency. A second limitation is that income is an accrual-based measure, which can be
manipulated by increasing or decreasing discretionary accruals. To address the accounting measures
limitations, we use market-to-book value of equity as an additional performance measure.
Control Variables
We include a number of control variables in our empirical tests that have been identified in
prior research as influencing corporate ownership structures. These variables control for differences
that arise from a firm’s pace of growth, country, and industry risk; the legal system of the country in
which the firm is incorporated; the market on which the firm trades; the firm’s industry; and the
firm’s relative size. Table 1 lists country specific factors for firms in each of our seven countries.
Firm Size
The importance of controlling for firm size stems from the results of research by Stigler (1958)
and Fama and French (1995) who document that small firms have, on average, lower earnings
scaled by book value of equity than large firms. Accordingly, we include a variable computed as the
logarithm of the total assets of a firm in Euros to control for possible size affects.
Growth
The growth rate of sales is defined as the difference between the logarithm of sales at time t and
t1. This variable is a proxy for growth opportunities and has been found to be negatively
correlated with profitability and leverage, supposedly because high-growth firms are more subject
to underinvestment (Myers 1977) and asset substitution problems, as they have more flexibility in
their choice of future investment (Titman and Wessels 1988).

Volume 11, No. 1, 2012
TABLE 1
Country Specific Factors
Country
Factor Austria Belgium France Germany The Netherlands Portugal Spain
Legal Origin (German ¼ 1) Yes No No Yes No No No
Importance of Equity Mkt. 7 11.3 9.3 5 19.3 11.8 7.2
Market Liquidity Ratio 0.062 0.54 0.085 0.062 0.46 0.60 0.83
Strength of Inv. Protect 3.7 7 5.3 5 4.7 6 5
This table reports the country of origin factors for firms in our sample. If a firm’s country of origin commercial/company
law has German legal roots, a dummy variable is set at 1 (other roots ¼ 0). The importance of the equity market was
measured by the mean rank across three variables: (1) the ratio of the aggregate stock market capitalization held by
minorities to gross national product, (2) the number domestically listed firms relative to the population, and (3) the
number of IPOs relative to the population. To account for market trading differences in a country, a market liquidity ratio
is included. The strength of investor protection (SIP) laws explains cross-country differences in the size of the banking
sector and the level of stock market development.
Country
The country variability of the return on assets (CRISK) is defined as the standard deviation of
the return on assets by country in a given year (proxy for business risk). These variables have not
been commonly used before except by Booth et al. (2001) who show that business risk seems to
have a different effect on profitability across countries and industries.
Industry
Studies by Nickel et al. (1997) and Giroud and Mueller (2007) found that because of
differences in the intensity of competition and industry maturity, agency problems as they affect
profitability, growth, and cash flow may be more or less severe in certain industries. To control for
industry, we use an industry risk (IRISK) variable measured as the standard deviation of companies’
ROA within each industry identified as one of ten sectors, based on their two-digit Standard
Industrial Classification (SIC) code.8
Legal Origin
La Porta et al. (1998) show that legal origin is an important variable in explaining a country’s
institutional environments. In this study, we use a dummy variable to capture a country’s legal
origin. This variable indicates whether a country’s commercial/company law has German legal
origins. If a firm’s country of origin commercial/company law has German legal roots (GLO1), a
dummy variable is set to 1 (0 otherwise).
Trading Environment
Numerous studies suggest that foreign companies self-selecting to trade on U.S. or U.K.
exchanges tend to be more transparent in their financial reporting practices and more frequently use
8
The exact nature of these sectors is listed in the narrative that accompanies Table 2.

Volume 11, No. 1, 2012
American ways of doing business. La Porta et al. (1997) and Levine (1998, 2002) claim that the
strength of investor protection laws explain cross-country differences in the size of the banking sector
and the level of stock market development.9 The Strength of Investor Protection index (SIP)10
measure determines the strength of minority shareholder protections against directors’ misuse of
corporate assets for personal gain. The indicators incorporate three dimensions of investor protections:
transparency of related-party transactions (extent of disclosure index), liability for self-dealing (extent
of director liability index), and shareholders’ ability to sue officers and directors for misconduct (ease
of shareholder suits index). The data come from a survey of corporate and securities lawyers and are
based on securities regulations, company laws, and court rules of evidence. The SIP score is the
simple average of the percentile rankings on its component indicators.
Some commentators (Black 1990; Roe 1994) have argued that it is precisely the highly liquid
nature of U.S. markets11 that makes it difficult to provide incentives to large shareholders to
monitor closely a firm’s financial position. It is believed that concentrated ownership sacrifices
liquidity, but enhances supervision whereas dispersed ownership enhances liquidity but sacrifices
supervision (Shleifer and Vishny 1986). It is also argued that controlling shareholder systems will
be characterized by weak equity markets—too much liquidity tied up in control blocks—and by
large differences in the value of controlling and minority blocks as a result of private benefit
extraction by the controlling shareholder. Accordingly, we added a market liquidity ratio (MLR)
obtained from Datascope as a control variable.
A related body of research finds that firms cross-listed on American public markets enjoy an
increase in share price around the time of their listing announcement (Lang et al. 2003) and that
market reaction is stronger the more a firm commits to the U.S. regulatory structure (Coffee 2002).
We control for possible differential effects related to the primary exchange on which a firm is listed.
We also include the index used in Leuz et al. (2003) to control for differences in the importance of a
firm’s equity market. This index measures the mean rank across three variables12 used by La Porta
et al. (1997) and provides a variable called the ‘‘importance of the equity market’’ (IEM).
Other Significant Owner

We also control for other than dominant significant owner(s) of the firms that have more than 5
percent but less than 25 percent ownership to identify their potential impact on company
performance. We believe that if other significant owners (bank, institution, block, or family) have
significant ownership and cash flow rights, they would likely have a vested interest in the firm’s
performance. Also, including other significant owners (OSO) in the regression might be
instrumental in detecting ‘‘tunneling,’’ i.e., concentrated owners’ ability to extract private benefits
using a degree of the capacity to control (Johnson et al., 2000). We define these variables as
OSOBank, OSOBlock, OSOInst, and OSOFamily/Ind.
9
Beck et al. (2003) indicate German legal origin countries tend to have less adaptable legal systems, as defined by
the degree to which case law and principles of equity, rather than simply statutory law, are accepted foundations
of legal decisions. They also find that French legal origin countries have less politically independent judiciaries,
as defined by the degree of tenure of Supreme Court judges and their jurisdiction over cases involving the
government.
10
We use the SIP from http://www.doingbusiness.org.
11
Enhanced liquidity in secondary markets is considered to be a benefit of dispersed ownership.
12
The three variables are the ratio of the aggregate stock market capitalization held by minorities to gross national
product, the number of domestically listed firms relative to the population, and the number of IPOs relative to the
population. Each number was ranked such that a higher score indicates greater importance of the stock market.

Volume 11, No. 1, 2012
V. THE DATA
To test our hypotheses, we collected data available on Orbis and Amadeus (Bureau von Dijk
electronic company [BvD]), which cover 98 percent of the market capitalization in our selected
countries. Amadeus mostly provides ownership data, and Orbis is the main source of accounting data.
All of the indexes come from the Doing Business.org website. Initially, we collected data for 2,893
publicly traded European companies for each sampling year (2005–2007).13 From the initial sample,
we omitted firms that did not adopt IFRS in 2005; those with incomplete data; firms that had a
dominant owner other than an institution, block, family/individual, or a bank; firms without an
identifiable dominant owner;14 partnerships with cross-holdings; and financial companies (a SIC code
starting with 6). Our resulting sample contains 1,533 firms with data for each of the three sample years
from Austria, Belgium, France, Germany, the Netherlands, Portugal, and Spain. The Italian sample is
not included in this study because databases and attempts to hand-collect company information did not
produce consistent ownership information for Italian firms in the years 2005 and 2006.15
Our sample, without the Italian subsample, includes approximately 75 percent of all publicly
traded Continental European firms. Our final sample covers about 52 percent of market
capitalization in the sampled countries. The dominant owners in our sample control an average
of 54 percent of the voting shares. Shares of the dominant owner are fairly evenly distributed,
ranging from 25–99.9 percent ownership, with some skewness to the right, consistent with Goergen
(2007). All firms with an ownership above 99 percent have been winsorized to 99 percent. In the
case of dominant ownership, no value below 25 percent was included. All firms in our sample have
fiscal years ending on December 31.
Panel A of Table 2 shows the country origin of our sample firms. Our sample is dominated by
German and French firms (72 percent). Table 2 also presents several interesting ownership patterns.
First, two-thirds of our sample firms are owned by blocks. Block ownership is between 65–68
percent in France, Germany, and Portugal and approximately 73 percent in Austria, Belgium, and
Spain. In the Netherlands, block ownership accounts for only 40 percent. Second, ownership by
families/individuals is much higher in French and German firms (approximately 20 percent). Third,
institutional ownership is 48 percent in the Netherlands.
Panel B of Table 2 provides the industry composition of our sample firms. Approximately 43
percent of our sample comes from the Manufacturing sector (D), with the next highest percentage of
firms (16 percent) from the Services sector (I). Unlike the patterns of ownership that emerged for
different countries, the percentage of different types of owners in industrial sectors largely reflects
the overall distribution of ownership.
Table 3 presents descriptive statistics for ownership concentration and return measures, first in
the context of overall dominant ownership and then for each dominant owner type.16 Panel A of
Table 3 reports that overall ownership ranges from 5 to 99.9 percent, with approximately 54 percent
of a firm, on average, owned by a concentrated owner. Panels B through E report that dominant
ownership within each subcategory ranges from 25 to more than 99 percent.
13
The decision not to extend the sample period beyond 2007 stems from the fact that the financial crisis changed
the 2008 and 2009 economic landscape in Europe.
14
Initially, 147 firms had a state as the concentrated owner and 389 firms had no identified dominant owner. The
decision to drop state-owned firms was for two reasons. First, a state could be identified as the dominant owner
for only 8 of the 147 firms. Second, because these firms frequently represent strategically important entities to the
state, the state may have had a special interest is ensuring their survival and used subsidies.
15
We are comfortable with the external validity of our results without the Italian sample because only slightly more
than 100 Italian firms could have been included in our sample.
16
Our descriptive statistics are consistent with those presented by Dherment-Ferere et al. (2003).

Volume 11, No. 1, 2012
TABLE 2
Country of Origin and Industrial Sector by Dominant Ownership Type (2005–2007 Means)
Panel A: Firms by Country
Ownership Type
Block Institution Bank Family/Individual Total
Austria 38 5 3 6 52
Belgium 73 19 3 5 100
France 341 66 15 105 527
Germany 392 59 8 117 576
Netherlands 41 48 8 4 101
Portugal 30 7 2 7 46
Spain 95 18 5 13 131
Total 1,010 222 44 257 1,533
Panel B: Firms by Industrial Sector

Ownership Type
Block Institution Bank Family/Individual Total
A (01–09) 5 1 — 1 7
B (10–14) 15 4 1 — 20
C (15–17) 30 9 1 5 45
D (20–39) 440 96 17 100 653
E (40–49) 119 24 5 17 165
F (50–51) 32 7 — 9 48
G (52–59) 39 11 2 10 61
H (60–67) 127 28 13 19 187
I (70–89) 201 42 5 95 243
J (91–99) 2 — — 1 3
Total 1,010 222 44 257 1,533
This table provides data on ownership types by country and industrial sector. Panel A presents the number of firms by
largest owner type for the seven Continental European countries. An institution is a nonbank corporation. A block is a
nonbank, nonfinancial institution corporation. Family/individual is a group of persons or person. Panel B presents the
number of firms by dominant owner type for the ten industrial sectors such as: Sector A: Agriculture, Forestry, and Fishing;
Sector B: Mining; Sector C: Construction; Sector D: Manufacturing; Sector E: Transportation, Communications, Electric,
Gas, and Sanitary Industries; Sector F: Wholesale Trade Sector G: Retail Trade; Sector H: Real Estate; Sector I: Services;
Sector J: Public Administration. The two-digit standard industrial classification (SIC) code was used to identify the firm.
The average return on shareholders’ funds (ROSF) and assets (ROA) for the entire sample is
14.3 percent and 5.3 percent, respectively, while MTB is 2.28.17 We note that both accounting
return measures have wide ranges.
17
Our exploratory data analyses included test for multicollinearity and normality. First, we computed the variable
inflation factor (VIF) for each variable. These results show no variables having a VIF of greater than 3.7. Thus,
we believe that it is unlikely that significant multicollinearity exists for the set of independent variables. We also
checked the sample for normality using the Shapiro-Wilk W-test. It did not identify the presence of a ‘‘fat-tailed’’
error distribution.

Volume 11, No. 1, 2012
TABLE 3
Descriptive Statistics on Performance and Ownership (2005–2007 Means)
Panel A: Overall Performance and Ownership (n ¼ 1,533)

Statistic
Minimum Maximum Mean Std. Dev.
ROSF 221.06 279.51 14.26 32.67
ROA 81.05 89.29 5.26 11.73
MTB 2.56 392.8 2.28 8.73
Overall Ownership Percentage 5.00 99.90 54.06 22.60
Panel B: Institution Dominant Owner Performance and Ownership (n ¼ 1,533)

Statistic
ROSF 115.24 88.71 12.84 27.33
ROA 81.05 35.99 4.64 12.28
MTB 2.56 392.8 2.28 14.1
Institution % 25.01 99.10 41.60 13.46
Block % 5.00 40.94 8.36 9.51
Bank % 5.00 31.00 2.76 5.73
Family/Individual % 15.00 37.15 23.83 8.10
Panel C: Block Dominant Owner Performance and Ownership (n ¼ 1,533)

Statistic
ROSF 213.93 279.51 13.51 31.80
ROA 55.64 89.29 5.11 11.32
MTB 1.68 74.08 1.86 3.04
Block % 25.00 99.90 54.06 22.60
Institution % 5.00 45.00 4.79 8.03
Bank % 5.00 36.10 1.92 4.98
Panel D: Bank Dominant Owner Performance and Ownership (n ¼ 1,533)

Statistic
ROSF 34.55 57.29 12.84 27.33
ROA 27.56 21.94 4.17 9.06
MTB 2.48 34.48 3.89 1.97
Bank % 25.00 99.00 30.36 13.86
Institution % 5.00 30.87 6.31 3.46
Block % 5.00 33.30 5.20 8.16
(continued on next page)

Volume 11, No. 1, 2012
TABLE 3 (continued)
Panel E: Family/Individual Dominant Owner Performance and Ownership (n ¼ 1,533)

Statistic
ROSF 155.25 189.38 15.56 29.55
ROA 43.76 55.68 6.03 12.28
MTB 2.20 26.8 3.2 1.79
Institution % 5.00 44.30 6.36 3.57
Block % 5.00 42.00 5.77 9.51
Bank % 5.00 24.00 10.60 2.69
Table 3 provides descriptive statistics on performance measures and concentration of ownership. Performance measures
are return on shareholders’ funds (ROSF), return on assets (ROA), and market-to-book value of equity (MTB). Ownership
concentration is the percentage of a firm owned by the dominant owner and the percentage of a firm owned by other
concentrated owners. An institution is a nonbank corporation. A block is a nonbank, nonfinancial institution corporation.
Family/individual is a group of persons or person. Panel A provides the minimum value, the maximum value, the mean,
and the standard deviation on the return variables and overall ownership percentage. Panels B, C, D, and E provide the
same descriptive statistics when the dominant owner is an institution, block, bank, and family/individual, respectively.
Panel B of Table 3 gives descriptive statistics when an institution is the dominant owner.
Institutions own 41.6 percent of the 222 firms in our subsample. For institutional ownership, both
mean accounting return measures are lower than most of the return measures in other subsamples.
Specifically, when institutions are the dominant owner, the average return on shareholders’ funds
and assets is 12.8 and 4.6 percent, respectively, and MTB is 2.3. This is consistent with previous
literature suggesting that institutions tend to be passive shareholders due to regulatory constraints
and lack incentives to monitor firms. This emanates from the fact that institutional funds suffer from
agency problems themselves and, therefore, have no direct or adequate incentives for monitoring
(Black 1990; Coffee 1991; Black and Coffee 1994).
Panel C of Table 3 shows that block dominant owners control 54.1 percent of the 1,010 firms in
the subsample. This large ownership stake seems to be consistent with block owners wanting a high
level of control to cement their vertical ties with the firms they own in the value chain. For this
sample, accounting returns are slightly higher than the institution and bank subsamples (13.5 and
5.1 percent, respectively) and MTB value is markedly lower than it is in any other subsample (1.9).
This is consistent with the previous findings of Conac et al. (2007) and Renneboog (2000) that
suggest that a block controlling a company’s actions may serve a legitimate business purpose for a
group of firms, but on the individual level, it comes with the cost of the loss of flexibility and the
risk of deficient monitoring, which ultimately results in lower market value of a controlled
company.
Bank dominated firms make up our smallest subsample and the smallest ownership category.
Panel D of Table 3 shows that banks own 30.4 percent of the 44 firms in our sample where a bank is
the dominant owner.18 For banks, accounting returns are comparable to accounting return measures
for firms in which an institution is the dominant owner. Specifically, when a bank is the dominant
owner, the average return on shareholders’ funds and assets is 12.8 and 4.2 percent, respectively.
The average MTB for the bank subsample is the highest in the sample (3.9), suggesting that banks
18
This ownership stake roughly approximates the ownership shares found by Thomsen and Pedersen (2000) for
their bank sample.

Volume 11, No. 1, 2012
can provide an efficient form of corporate governance and offer a way of resolving collective action
problems among multiple investors.
Panel E of Table 3 presents descriptive statistics on the last of our dominant owner types. A
family or individual is the dominant owner in 257 sample firms. The concentration of family/
individual ownership tends to be just slightly less than the average block dominant ownership (i.e.,
51.8 percent compared to 54.1 percent). As with block ownership, the family/individual owner
appears to have a preference for control and majority interest. Accounting returns for firms owned
by a family/individual exceed all other ownership categories (average return on shareholders’ funds
and assets is 15.6 and 6.0 percent, respectively) and MTB is only slightly lower than in the bank
subsample (3.2). The results are consistent with previous findings related to family/individual
activism in both owning and managing a company.
Other significant (non-dominant) owners in our sample also control substantial stakes of
equity. In the institution dominant owner subsample (Table 3, Panel B), block ownership represents
more than 8 percent of total ownership while family/individual ownership is nearly 24 percent. In
the block dominant owner subsample (Table 3, Panel C), family/individual ownership averages
more than 24 percent. Overall, family/individual ownership is the second highest type of ownership
in Table 3, Panels B, C, and D. Bank dominant ownership is low when institutions and blocks are
the dominant owners (see Table 3, Panels B and C).
The descriptive statistics of ownership by country in the sample are presented in Table 4. In all
countries, this measure has relatively high ranges when compared to typical ownership
concentrations in the U.S. and U.K. The descriptive statistics in Panel A of Table 4 indicate that
Austria, Belgium, Germany, and France have the highest levels of overall ownership concentration
(all means are over 50 percent).
Panel B of Table 4 presents the descriptive statistics for the overall institutional ownership
across countries. France, Belgium, and Austria display the most concentrated ownership in this
subsample: means are 51.9, 50.0, and 49.1 percent, respectively. The Netherlands, Spain, and
Portugal have average institutional ownership concentration of slightly more than one-third.
Panel C of Table 4 shows that Austria, Germany, and France have the highest levels of block
ownership concentration for the subsample: means are 68.0, 63.7, and 60.9 percent, respectively.
The average block concentration is lowest for Dutch firms in our sample (42.7 percent).
The results in Panel D of Table 4 indicate that Belgium and France have the highest levels of
ownership concentration by banks (more than 40 percent). On the other end of the ownership
spectrum, Dutch firms have the lowest average level of bank ownership concentration (15.4
percent).
Levels of family/individual ownerships, as shown in Panel E of Table 4, are high in all of the
countries except Spain (40.3 percent) and Portugal (36.9 percent). Overall, the most concentrated
ownership class of firms in Austria, Belgium, France, and Germany is family/individual, followed
by blocks, institutions, and then banks. Even though the concentration of the family/individual
ownership is also high for firms in the Netherlands, only four Dutch firms in our sample have
families/individuals as dominant owners.
VI. RESULTS
Correlation Analysis
Table 5 presents the relationships of performance ratios, independent variables, and control
variables for country and industry. The correlation test suggests that ROA significantly correlates
with ROSF (r ¼ 68 percent, significant at 0.05 percent level), while the correlation of MTB with
ROA and ROSF is around 0.2 percent. The significant correlation between ROA and ROSF is likely

Volume 11, No. 1, 2012
TABLE 4
Descriptive Statistics on Ownership by Country
Panel A: Overall Ownership (n ¼ 1,533)

Austria 13.00 99.60 53.89 17.13
Belgium 9.12 99.90 53.14 38.65
Germany 5.60 99.90 57.22 21.73
France 5.00 99.90 55.73 23.86
Netherlands 5.01 98.00 35.80 24.37
Spain 9.20 99.90 36.92 19.76
Portugal 6.41 96.00 38.58 17.91
Panel B: Institution Ownership (n ¼ 1,533)

Austria 41.10 58.80 49.10 7.12
Belgium 14.80 93.20 51.04 23.05
Germany 10.00 96.70 43.59 25.14
France 10.50 99.10 51.87 23.55
Netherlands 5.00 95.04 32.25 21.14
Spain 11.40 90.50 32.06 21.33
Portugal 6.41 68.57 31.78 21.51
Panel C: Block Ownership (n ¼ 1,533)

Austria 15.00 99.56 67.97 20.31
Belgium 9.12 99.90 51.94 20.83
Germany 5.60 99.90 63.68 23.99
France 14.40 99.90 60.84 19.93
Netherlands 5.00 98.00 42.70 22.03
Spain 16.10 99.90 52.30 21.57
Portugal 20.00 96.00 56.24 19.06
Panel D: Bank Ownership (n ¼ 1,533)

Austria 13.00 50.46 29.49 19.13
Belgium 11.00 54.96 43.60 48.20
Germany 10.00 37.80 30.50 16.01
France 13.70 89.00 41.11 27.32
Netherlands 5.00 34.60 15.35 12.07
Spain 10.42 37.82 23.05 11.70
Portugal 10.57 48.28 29.39 17.75

Volume 11, No. 1, 2012
TABLE 4 (continued)
Panel E: Family/Individual Ownership (n ¼ 1,533)

Austria 29.00 95.00 69.02 28.03
Belgium 13.20 99.90 65.98 32.65
Germany 5.97 99.90 67.09 26.16
France 5.00 99.90 67.17 23.00
Netherlands 13.45 96.50 52.90 34.26
Spain 9.20 85.93 40.27 21.14
Portugal 22.00 70.02 36.94 16.05
This table provides descriptive statistics on ownership concentration by country. Ownership concentration is the
percentage of a firm owned by the different types of owner. An institution is a nonbank corporation. A block is a
nonbank, nonfinancial institution corporation. Family/individual is a group of persons or person. Panel A provides the
descriptive statistics on the return variables and ownership percentage of the overall owner. Panels B, C, D, and E
provide the same descriptive statistics when the owner is an institution, block, bank, and family/individual, respectively.
because they share an earnings number in their numerators. MTB, on the other hand, is influenced
by the market value of a firm.
The results presented in the correlation matrix show that ROA significantly and inversely
correlates with GLO1 and positively correlates with IEM. ROSF is significantly correlated with
family/individual, institutional, and bank dominant and concentrated ownership, while the results of
correlation analysis for MTB do not show any significant correlations with dominant or significant
ownerships. Interestingly, results for block, institutions, and bank dominant and concentrated
ownership consistently show negative significant association with GLO1 (reinforcing the idea that
German legal origin countries tend to have less adaptable legal systems, with decisions mostly
based on statutory law with much less room for managers’ discretion) and positive significant
association with IEM, while the association of family/individual dominant ownership in both cases
works in an opposite direction, being significantly positive for GLO1 and significantly negative for
IEM. The latter result, we believe, suggests that family/individual dominant and concentrated
owners are much more efficient monitors if they are supported by the rigid laws.
Regression
We employed ordinary least squares (OLS) regression to test our hypotheses (performed with
robust standard errors). Panel A of Table 6 presents the results of the test that the level of ownership
of a firm’s dominant owner is related to a firm’s performance. These results show that the overall
ownership percentage is not statistically significant for any of the performance measures. We
theorize that the inability to find a significant statistical relationship between the level of a firm’s
dominant owner and performance could be due to that fact that the relationship between ownership
and performance is nonlinear (McConnell and Servaes 1990). To test this assertion, we estimate
piecewise linear regressions for the relationship between the profitability ratios and ownership to
find the points of the changes in the behavior of this relationship. The results of the tests performed
for each type of owner did not provide support for the idea that the nature of the relation between
the level of ownership and company’s performance changes from positive to negative as the level of
the ownership changes. Therefore, we are left to believe that insignificant results can be attributed to
the inconsistency in the preferences of different types of owners in different countries as to the

Volume 11, No. 1, 2012
TABLE 5
Pearson Correlations
Panel A: ROSF to OSOFam/Ind

OSOFam/
ROSF ROA MTB GLO1 IEM MLR SIP Assets Ind
ROSF 1 0.685** 0.0030.144** 0.090*** 0.073*** 0.024 0.165*** 0.054**
0.00 0.886 0.00 0.00 0.00 0.236 0.00 0.008
ROA 0.685** 1 0.0020.083*** 0.073** 0.018 0.033 0.037 0.003
0.00 0.907 0 0 0.38 0.104 0.069 0.895
MTB 0.003 0.002 1 0.017 0.007 0.019 0.005 0.029** 0.018
0.886 0.907 0.413 0.751 0.345 0.794 0.163 0.375
GLO1 0.144** 0.083***0.017 1 0.704** 0.517** 0.435**0.029 0.182**
0 0 0.413 0 0 0 0.158 0
IEM 0.090*** 0.073** 0.0070.704** 1 0.148** 0.191** 0.016 0.224**
0 0 0.751 0 0 0 0.428 0
MLR 0.073*** 0.018 0.0190.517** 0.148** 1 0.018 0.028 0.070**
0 0.38 0.345 0 0 0.373 0.179 0.001
SIP 0.024 0.033 0.0050.435** 0.191** 0.018 1 0.007 0.042*
0.236 0.104 0.794 0 0 0.373 0.723 0.041
Assets 0.165*** 0.037 0.0290.029 0.016 0.028 0.007 1 0.04
0 0.069 0.163 0.158 0.428 0.179 0.723 0.05
OSOFam/Ind 0.054** 0.003 0.018 0.182** 0.224** 0.070** 0.042* 0.04 1
0.008 0.895 0.375 0 0 0.001 0.041 0.05
FamInd-Dom 0.058** 0.014 0.016 0.138** 0.178** 0.066** 0.036 0.005 0.833**
0.005 0.5 0.437 0 0 0.001 0.082 0.805 0
OSOBlock 0.016 0.01 0.007 0.01 0.075** 0.043* 0.015 0.047* 0.439**
0.445 0.638 0.728 0.634 0 0.036 0.454 0.023 0
Block-Dom 0.028 0.015 0.0210.053* 0.004 0.028 0.046* 0.024 0.508**
0.166 0.457 0.302 0.01 0.828 0.178 0.024 0.243 0
OSOInst 0.066** 0.02 0.0080.143** 0.156** 0.027 0.051* 0.005 0.166**
0.001 0.319 0.71 0 0 0.194 0.014 0.795 0
Inst-Dom 0.078** 0.027 0.0030.107** 0.197** 0.068** 0.005 0.027 0.233**
0 0.189 0.865 0 0 0.001 0.824 0.196 0
OSOBank 0.079** 0.001 0.0030.084** 0.045* 0.041* 0.008 0.060** 0.124**
0 0.951 0.873 0 0.03 0.044 0.706 0.003 0
Bank-Dom 0.036 0.003 0.0030.041* 0.071** 0.022 0.013 0.060** 0.111**
0.08 0.894 0.902 0.044 0.001 0.292 0.529 0.003 0
Growth 0.588*** 0.909** 0.0010.035 0.009 0.027 0.027 0.005 0.052*
0 0 0.968 0.103 0.687 0.205 0.203 0.823 0.015
Panel B: FamIndDom to Growth

Bank-
FamInd-Dom OSOBlock Block-Dom OSOInst Inst-Dom OSOBank Dom Growth
ROSF 0.058** 0.016 0.028 0.066** 0.078** 0.079** 0.036 0.588**
0.005 0.445 0.166 0.001 0.00 0.00 0.08 0.00
ROA 0.014 0.01 0.015 0.02 0.027 0.001 0.003 0.909**
0.5 0.638 0.457 0.319 0.189 0.951 0.894 0

Volume 11, No. 1, 2012
TABLE 5 (continued)
Bank-
FamInd-Dom OSOBlock Block-Dom OSOInst Inst-Dom OSOBank Dom Growth
MTB 0.016 0.007 0.021 0.008 0.003 0.003
0.003 0.001
0.437 0.728 0.302 0.71 0.865 0.873
0.902 0.968
GLO1 0.138** 0.01 0.053* 0.143** 0.107** 0.084**
0.041* 0.035
0 0.634 0.01 0 0 0 0.044 0.103
IEM 0.178** 0.075** 0.004 0.156** 0.197** 0.045*
0.071** 0.009
0 0 0.828 0 0 0.03
0.001 0.687
MLR 0.066** 0.043* 0.828 0.027 0.068** 0.022
0.041* 0.027
0.001 0.036 0.178 0.194 0.001 0.044
0.292 0.205
SIP 0.036 0.015 0.046* 0.051* 0.005 0.013
0.008 0.027
0.082 0.454 0.024 0.014 0.824 0.706
0.529 0.203
Assets 0.005 0.047* 0.024 0.005 0.027 0.060**
0.060** 0.005
0.805 0.023 0.243 0.795 0.196 0.003
0.003 0.823
OSOFam/Ind 0.833** 0.439** 0.508** 0.166** 0.233** 0.124**
0.111** 0.052*
0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.015
FamInd-Dom 1 0.527** 0.661** 0.155** 0.273** 0.105**
0.111** 0.007
0.00 0.00 0.00 0.00 0.00
0.00 0.725
OSOBlock 0.527** 1 0.838** 0.250** 0.256** 0.103**
0.132** 0.036
0 0.00 0.00 0.00 0.00 0.00
0.00 0.093
Block-Dom 0.661** 0.838** 1 0.242** 0.321** 0.044*
0.131** 0.016
0 0 0 0 0.03
0 0.46
OSOInst 0.155** 0.250** 0.242** 1 0.722** 0.034
0.007 0.012
0 0 0 0 0.719
0.098 0.577
Inst-Dom 0.273** 0.256** 0.321** 0.722** 1 0.054**
0.012 0.013
0 0 0 0 0.565
0.009 0.546
OSOBank 0.105** 0.103** 0.044* 0.007 0.012 1 0.596** 0.043*
0 0 0.03 0.719 0.565 0 0.043
Bank-Dom 0.111** 0.132** 0.131** 0.034 0.054** 0.596** 1 0.048*
0 0 0 0.098 0.009 0 0.023
Growth 0.007 0.036 0.016 0.012 0.013 0.043* 0.048* 1
0.725 0.093 0.46 0.577 0.546 0.043 0.023
*, **, *** Significant level at 10 percent, 5 percent, and 1 percent levels, respectively.
The variables are described in Table 6.
objective of economic profit maximization and that the strength of an aggregated relationship
between dominant ownership and performance is actually mitigated by this inconsistency.
An examination of the control measures for the overall sample shows that firm size has a
significant association with both performance measures (p 0.05). Additionally, country specific
risks are negatively associated with return on assets and return on shareholders’ funds (p 0.05).
No significant association was found between MTB and country specific risk, suggesting that the
impact of existing variability in return on assets in various European nations on market-to-book
value of a firm is limited. We found, however, that MTB has a significant inverse association with
industry risk (p 0.01), which suggests that the differences between various industry sectors
account for a significant fraction of a firm discount. GROWTH is negatively associated with both
accounting measures, ROSF and ROA, which is consistent with the trade-off theory prediction that
growing firms have more acute assets substitution problems and that they lose more of their value if
they go into distress.

Volume 11, No. 1, 2012
TABLE 6
Relationship between Dominant Ownership and Returnsa (2005–2007 Means)
Model : YðROA; ROSF; MTBÞ ¼ b0 þ b1 PERCENT þ b2 SIZE þ b3 CRISK þ b4 IRISK
þ b5 GROWTH þ b6 þ GLO1 þ b7 SIP þ b8 MLR þ b9 IEM
þ b10 ðOSOBank; OSOBlock; OSOFam=IndÞ:
Panel A: H1 Overall Ownership and Returns—1,533 Firms

Variable ROA ROSF MTB
Intercept 0.96 0.56 0.11**
PERCENT 0.052 0.410 0.085
SIZE 0.258** 0.233*** 0.044*
GROWTH 0.91** 0.573** 0.006
CRISK 0.359*** 0.247** 0.773
IRISK 0.281 0.390 0.96***
GLO1 0.073** 0.439** 0.327
SIP 0.001* 0.135* 0.099*
MLR 0.034 0.179* 0.032*
IEM 0.26 0.46 0.54
OSOBank 0.014 0.025 0.028
OSOBlock 0.121* 0.200** 0.044
OSOInst 0.081* 0.076** 0.021
OSOFam/Ind 0.079** 0.83** 0.012
F-stat 16.55** 26.4*** 1.063
Adj. R2 0.081 0.104 0.000
a
We also ran the regressions for 2005, 2006, and 2007 separately and received consistent results.
Panel B: H2 Institution Ownership and Returns—222 Firms

Intercept 0.23 0.58** 0.12**
PERCENT 0.039*** 0.013 0.017
SIZE 0.052*** 0.233*** 0.037
GROWTH 0.915*** 0.571*** 0.006
CRISK 0.271*** 0.192*** 0.489*
IRISK 0.475 0.323 0.103**
GLO1 0.024 0.468*** 0.334**
SIP 0.007 0.145*** 0.102**
MLR 0.013 0.205*** 0.186**
IEM 0.22 0.16 0.08
OSOBank 0.001 0.28* 0.206
OSOBlock 0.107*** 0.137*** 0.024
OSOFam/Ind 0.106*** 0.105*** 0.022
F-stat 36.2*** 26.8*** 2.39**
Adj. R2 0.37 0.430 0.002

Volume 11, No. 1, 2012
TABLE 6 (continued)
Panel C: H3 Bank Dominant Ownership and Returns—43 Firms

Intercept 0.300 0.57 0.11**
PERCENT 0.008** 0.001** 0.013
SIZE 0.053**** 0.236*** 0.036
GROWTH 0.91*** 0.573**** 0.005
CRISK 0.303 0.321 0.502
IRISK 0.485 0.651 0.105
GLO1 0.004 0.457*** 0.315**
SIP 0.002 0.140*** 0.0095**
MLR 0.006 0.192*** 0.174**
IEM 0.011 0.028 0.050**
OSOBlock 0.124**** 0.172*** 0.022
OSOInst 0.072**** 0.060** 0.021
OSOFam/Ind 0.119**** 0.136*** 0.020
F- stat 38.4 46.2 1.254
Adj. R2 0.401 0.431 0.001
Panel D: H4 Family/Individual Dominant Ownership and Returns—257 Firms

Intercept 0.530 6.27*** 0.121**
PERCENT 0.085** 0.135*** 0.030*
SIZE 0.058*** 0.236**** 0.038*
GROWTH 0.91**** 0.568**** 0.006
CRISK 0.373 0.306 0.596
IRISK 0.021 0.241 0.986
GLO1 0.069 0.492**** 0.336**
SIP 0.017 0.150*** 0.101**
MLR 0.037* 0.214** 0.184**
IEM 0.012 0.05 0.03
OSOBank 0.002 0.021** 0.028
OSOBlock 0.111*** 0.180*** 0.034
OSOInst 0.062*** 0.060** 0.026
F-stat 25.3*** 44.32*** 1.365
Adj. R2 0.836 0.432 0.002
Panel E: H5 Block Dominant Ownership and Returns—1,010 Firms

Intercept 0.26 0.59** 0.012**
PERCENT 0.092**** 0.075** 0.002*
SIZE 0.055**** 0.012*** 0.038*
GROWTH 0.912**** 0.565*** 0.007
CRISK 0.249*** 0.139 0.333
IRISK 0.592 0.451 0.448**
GLO1 0.040 0.492*** 0.337**
SIP 0.008 0.151*** 0.337**
MLR 0.020 0.222*** 0.102**

Volume 11, No. 1, 2012
TABLE 6 (continued)
IEM 0.023 0.100 0.091
OSOBank 0.007 0.044** 0.187**
OSOInst 0.060**** 0.018 0.921
OSOFam/Ind 0.101**** 0.069** 0.007
F-stat 54.6 46.8**** 1.277
Adj. R2 0.836 0.422 0.001
*, **, ***, **** Representing significance at 0.10, 0.05, 0.01, and 0.001 levels, respectively, for each independent
variable remaining in the last step of the regression, its coefficient is given along with its level using a two-tailed test
based on the Student’s t-test for means. If a coefficient is not significant, it is does not have an asterisk.
This table presents the results of regressing the percentage of a firm owned by the dominant shareholder and the control
variables against return on assets (ROA), return of shareholders’ funds (ROSF), and market-to-book value of equity
(MTB). Each panel presents the results for the step in the regression just prior to dropping the percentage of ownership
variable.
The last two rows in the table report the F-statistic and the adjusted fit of the regression (Adj. R2). All regressions include
industry and country controls.
Variable Definitions:
ROA ¼ return on assets;
ROSF ¼ return on shareholders’ funds;
MTB ¼ market-to-book value of equity;
PERCENT ¼ ownership share of a firm by the dominant owner;
SIZE ¼ log of total assets (in Euros) of the firm;
GROWTH ¼ increase in sale between year t and t1;
CRISK ¼ country risk measured as standard deviation of companies ROA within each country to control for country-
specific differences;
IRISK ¼ industry risk measured as the standard deviation of companies ROA within each industry to control for industry;
GLO1 ¼ dummy variable set to 1 if a firm’s country of origin commercial/company law has German legal roots, and 0
otherwise;
SIP ¼ disclosure index included to account for varying degrees of investor protection regulations in the different
countries;
MLR ¼ market liquidity ratio included to account for market trading differences in a country;
IEM ¼ scaled variable included that represents the importance of the equity market in obtaining funds for a firm. The
importance of the equity market was measured by the mean rank across three variables: (1) the ratio of the
aggregate stock market capitalization held by minorities to gross national product, (2) the number of domestically
listed firms relative to the population, and (3) the number of IPOs relative to the population. Each number was
ranked such that higher score indicates greater importance of the stock market; and
OSOBlock, OSOBank, OSOInst, and OSOFam/Ind ¼ other than dominant significant owner(s) of the firms with an
ownership more than 5 percent but less than 25 percent.
Table 6 (Panels B through E) presents the results of the tests for the hypotheses that relate
specific types of dominant ownership to performance.19 Panel B of Table 6 reports that there is no
significant relationship between institution ownership and ROSF and MTB. Conversely, we find a
statistically significant inverse association between ROA and ownership when an institution is the
dominant owner. This result supports previous findings that institutions are likely to take an
investor perspective, which is characterized by the focus on portfolio investment returns (Nickel et
al. 1997; Thomson and Pederson 2000). Consistent with the results for the overall sample, we find
(1) a significant positive effect of size on ROA and ROSF in this subsample (p 0.01); (2) country
19
Initially, we included other ownership shares in the regressions. We dropped them from subsequent regressions
because all their regression coefficients have insignificant t-values.

Volume 11, No. 1, 2012
specific risk is significantly negatively associated with ROA and ROSF (p 0.01); (3) industry risk
is significantly negatively associated with MTB (p 0.05); and (4) GROWTH is negatively
associated with ROA and ROSF. The consistency of the results in Panels A and B of Table 6
suggests that the owners’ identity in the subsample where institutions are dominant owners does not
change the firms’ performance, which, as we stated above, is characteristic of the investor
perspective where the concern is about a whole portfolio performance.
Panel C of Table 6 shows positive statistical support for the relationship between ownership
and performance when a bank is the dominant owner (p 0.05). This relationship is somewhat
surprising given that banks have below average ownership shares in firms compared with other
forms of ownership. We believe that this result can be attributed to banks providing a host of
financial services to firms, thereby gaining a special position in their governance. There is also a
positive effect of size on performance (p 0.01), and perhaps more important, a negative effect
that investor protection laws, the market liquidity ratio, importance of equity markets, and legal
origin seem to have on firms owned by the banks (p 0.05). The results suggest institutional
environments explicitly and implicitly impose restrictions on the actions of a bank-owned firm,
thereby reducing ways it can choose to be profitable. Overall, the statistical results for this
subsample suggest that banks as dominant owners have strong incentives to monitor a company.
So, despite relatively low levels of ownership in the firms, bank dominant ownership remains an
efficient form of corporate governance.
Panel D of Table 6 shows statistical support for the relationship between dominant level of
ownership and performance in family/individual owned firms (p 0.05). Our analysis finds,
consistent with the findings presented in Panel C for bank-owned firms, that strong institutional
characteristics have a statistically negative impact on performance (p 0.05). Additionally, as in
the other subsamples, size has a significant impact on accounting performance measures (p
0.01). In general, the statistical results for the family/individual dominant owner subsample are
consistent with those for banks, suggesting that given the size of a family/individual investment in a
company, it is in their best interest to ensure long-term company survival.
Panel E of Table 6 reports a significant relationship (p 0.01) between the dominant
ownership of a block and a firm’s performance, which is consistent with the finding of Thomsen et
al. (2006) and Hopt (2006). What makes these results interesting, however, is that the sign of the
coefficient between the ownership and performance is negative for all return measures. We interpret
this negative ownership impact on the returns of a firm to be a manifestation of the coupling of the
agency costs of the firms and the owners without associated value being contributed by the
dominant block owner. Or, said in another way, what is subtracted from returns by two sets of
agency costs is not being offset by the value added from the dominant owner’s effort or expertise.
To some degree, the negative effects arising from block ownership are mitigated when a firm is
large (p 0.01). This is consistent with the results when overall dominant ownership is regressed
against returns (see Panel A of Table 6).
It is worth noting here that in every subsample (Panels B through D of Table 6), other
significant owners have significant negative impact on a firm’s performance. We believe that in this
case we have detected ‘‘tunneling,’’ i.e., concentrated owners’ ability to extract private benefits
using a degree of the capacity to control. This finding is consistent with previous reports that non-
dominant shareholders have greater incentives to extract private benefits (Johnson et al. 2000).
To check for the robustness of these results (i.e., to ensure that the inferences are reasonable),
we examine the assumptions underlying our regressions using generalized least square regression
(GLS). The results of the Hausman test suggest that under the null hypothesis of correlation
between the errors and the regressors, the random effects model is applicable and its GLS estimator
is consistent and efficient at a significance level of 5 percent for all performance measures: ROA (v2
¼ 6.68, Prob. . v2 ¼ 0.56, q ¼ 0.32); ROSF (v2 ¼ 8.94, Prob. . v2 ¼ 0.48, q ¼ 0.29), and MTB (v2 ¼

Volume 11, No. 1, 2012
7.11, Prob. . v2 ¼ 0.42, q ¼ 0.27).20 The final results suggest that the null hypothesis cannot be
rejected. Both estimators produce similar results, (i.e., the results and signs of the GLS test have
been consistent with previous findings for both profitability ratios).
Additional Tests
The second set of results is presented in Table 7. Following the latest research on the
importance of national settings for a variety of business relationships (Jansen et al. 2009), we
evaluate whether there is a differential country impact on the association between dominant
ownership types and performance, using backward, multistep OLS regressions run to completion.
Table 7 contains a series of panels when country of origin for each firm is represented by a matrix21
of dummy variables.
After disaggregating our sample by country, the results in Panel A of Table 7 show marginal
statistical support that institutions in Germany and Spain provide efficient monitoring. The results
related to Spain are consistent with the results reported by López-Iturriaga (2003) and Kirchmaier
and Grant (2006), which suggest that in the last several years, the ownership landscape in Spain has
changed substantially from being dominated by the state to being owned by institutions. During this
transition, the financial system in Spain remained heavily dependent on credit, making institutions
(investment funds in particular) not just owners but also major capital providers. The result related
to Germany is consistent with the latest efforts of the German government to stabilize the role
played by institutional investors.
The results in Panel B of Table 7 identify that bank dominant owners exercise active control in
Belgium and France. In Germany, banks show significant association only with MTB. Contrary to
our expectations, the results show no significant impact on the firms’ accounting performance for
the German subsample. We believe that this is an outcome of the latest developments in the German
regulatory environment related to the measures designed to stimulate the restructuring of the
German economy to make it more market centered. Also, particular steps have been taken to reduce
the role of banks so as to promote a more efficient allocation of capital across diverse industries.22
Bank dominant ownership has a marginally inverse significant correlation with return on assets and
return on shareholders’ funds in Portugal. This finding is consistent with the study of Lozano-Vivas
et al. (2002), which suggests that banks in Portugal have low average efficiency scores as well as
low return on equity levels.
The results presented in Panel C of Table 7 suggest that family/individual dominant owners
have strong inverse impact on accounting returns in Portugal. Closer examination of the Portuguese
subsample reveals that family/individual ownership in Portugal is much less concentrated than in
other countries, with predominantly two individuals sharing the dominant ownership. As a result,
private benefits of control for them exceed the costs of close monitoring (Doidge et al. 2006). We
also report strong impact on return on shareholders’ funds in France and Germany, as families/
individuals represent the most concentrated ownership class there. Market-to-book value is
significantly impacted by family/individual dominant owners only in France. These findings are
20
The Hausman test for the equality of estimates produced by two estimators was used to check the suitability of a
random versus a fixed effects model.
21
The matrix is constructed by multiplying a dummy for each dominant owner type by the percentage of the
dominant owner’s ownership in each country.
22
The Act Regarding Integrity of Companies and Modernization of Stock Corporation Law (Gesetz zur
Unternehmensintegrität und Modernisierung des Anfechtungsrechts, UMAG) was approved by the German
government effective in 2005, which substantially improved minority shareholders’ rights. Additionally, the
latest tax reform, effective in 2002, allows German businesses to sell shares held for at least one year without
facing a tax bill of 58 percent on the appreciation of these shares.

Volume 11, No. 1, 2012
TABLE 7
Relationship between Dominant Ownership and Returns by Country
Model : YðROA; ROSF; MTBÞ
¼ b0 þ b1 PERCENT þ b2 SIZE þ b3 CRISK þ b4 IRISK þ b5 GROWTH þ b6 þ GLO1
þ b7 SIP þ b8 MLR þ b9 IEM þ b10 ðOSOBank; OSOBlock; OSOFam=IndÞ:
Panel A: H2 When Institutions Are the Dominant Owner—222 Firms

Intercept Size Belgium France Germany Portugal Spain F-Stat Adj. R2
ROA 0.030 0.120* 0.07 0.120* 3.30** 0.022
ROSF 0.080 0.100 0.11 0.140* 4.26** 0.016
MTB 0.017 0.08 0.13* 0.091 3.02** 0.071
Panel B: H3 When Banks Are the Dominant Owner—43 Firms

ROA 0.340 0.620** 0.120** 0.230** 0.460 0.270* 3.98** 0.250
ROSF 0.490 0.320** 0.740** 0.290** 0.230 0.170* 15.04*** 0.550
MTB 0.710 2.81 0.119* 0.210** 1.11** 0.090 3.45** 0.280
Panel C: H4 When Families/Individuals Are the Dominant Owner—257 Firms

ROA 0.230 0.080* 0.070 0.140 0.110** 4.15*** 0.014
ROSF 0.410 0.130* 0.110** 0.260** 0.120** 4.78*** 0.032
MTB 0.620 1.18** 0.98** 0.667 0.431 3.02** 0.021
Panel D: H5 When Blocks are the Dominant Owner—1,010 Firms

ROA 0.110 0.120*** 0.060* 0.070 6.34*** 0.015
ROSF 0.210 0.120*** 0.030 0.090* 10.01*** 0.013
MTB 0.011 2.6** 0.261 1.21*** 6.31*** 0.100
*, **, *** Significance is indicated at 0.10, 0.05, and 0.01 levels, respectively, using a two-tailed test based on the
Student’s t-test for means. For each independent variable remaining in the final step of the regression, its coefficient is
given along with its level of significance. If a coefficient is not significant, it does not have an asterisk.
This table presents the results of using backward, multistep OLS regressions run to completion regressing the percentage
of a firm owned by the dominant shareholder, and the control variables against return on assets (ROA), return on
shareholders’ funds (ROSF), and market-to-book value of equity (MTB) by country. The coefficients are the average of
the regression coefficients from annual regressions. Each panel presents the results when run to completion. SIZE is the
log of total assets (in Euros) of the firm. The last two columns in the table report the F-statistic and the adjusted fit of the
regression (Adj. R2).
consistent with the studies by Dherment-Ferere et al. (2003), Fogel (2006), and Kirchmaier and
Grant (2006) on corporate ownership and control in Europe. These studies suggest that, despite all
the efforts to change the ownership pattern and control devices in these countries, families still
represent the most concentrated type of shareholders with the most powerful means of control.
Results for block dominant ownership reported in Panel D of Table 7 suggest marginal
statistical support for firms in Belgium. In Belgium, it appears that non-financial firms are

Volume 11, No. 1, 2012
augmenting their voting power with the intention of disciplining under-performing managers. These
findings are congruent with the results of Dherment-Ferere et al. (2003). Market-to-book value is
significantly impacted by block dominant owners in Germany, which is consistent with the results
presented in Panels A and B of Table 7. We believe that the same effort of the German government
to change the regulatory environment to stimulate the reconstruction of the German economy to be
more market oriented has impacted all institutional investors in the country.
VII. EVALUATION OF THE FINDINGS

Building a sound institutional environment is a prerequisite for successful economic stability.
In this sense, the results of our study suggest that closer coordination of EU economic policies and
continuous cross-border cooperation will be fruitful in improving the opportunities for investment
in EU companies and will become instrumental in aligning the interests of the various ownership
types in different Continental European countries. Another contribution we believe this paper
makes is in operationalizing the definition of dominant ownership. We determined that in order for
a shareholder to be classified as a firm’s dominant owner, the owner must meet three conditions.
First, the dominant owner has to be the largest holder of shares for at least three years prior to the
years under investigation. Second, the dominant owner has to solely own the largest block of voting
shares and has to have no less than 25 percent ownership. Third, the dominant owner of the firm has
to own a majority of the total shares (along with the majority of voting shares) with no other
shareholder owning a stake of equal size in the firm.
Our general findings suggest that when institutions are dominant owners they do not actively
exercise control in Continental Europe even when they have the capacity to control an entity. The
contrary result found in Spain may be attributed to privatization (López-Iturriaga 2003; Kirchmaier
and Grant 2006), which altered the ownership landscape. However, as Glen and Singh (2005)
suggest, Spanish companies still tend to rely on credit financing rather than direct investments.23
We believe that when/if the investment funds become dominant owners and, subsequently, main
credit capital providers, the investment funds’ interest in a company’s success will overshadow the
cost of monitoring.
For our largest sample of firms in which a block is the dominant owner, we note a significant
negative relationship between dominant ownership and performance, which indicates either
tunneling or less monitoring. We also found that the size of a firm is a significant factor in
determining firm performance. Subsequent tests for this subsample disaggregated by country
provided no additional notable findings.
We find that families and individuals in continental European countries remain a very
important group of relational owners. Strong positive results reflect the belief that positive
performance is a product of a family’s or individual’s ‘‘shareholder activism,’’ both in owning and
managing a firm and the owner’s focus on long-term survival. It appears that for firms in countries
with stronger investor protection laws and higher market liquidity ratios, the actions of family or
individual dominant owners are likely inhibited, leading us to believe that dominant family/
individual owners are less active in market-oriented environments. Further disaggregating this
subsample by country disclosed that countries in Continental Europe are not homogenous in terms
of the concentration of family/individual ownership and their effect on performance. Subsequent
tests confirm that in France, Germany, and Belgium, family/individual ownership remains the most
concentrated ownership type and appears to provide efficient monitoring. However, we failed to
find analogous results in Austria, Spain, and the Netherlands. As we stated earlier, family/individual
23
According to Glen and Singh (2005), on average, 68 percent of investment growth in Spanish companies is
financed by debt.

Volume 11, No. 1, 2012
dominant ownership in Portugal strongly and inversely correlates with both performance ratios.
Closer inspection of the family/individual-owned firms in Portugal reveals that the majority of them
have no more than two recorded shareholders, which is consistent with earlier findings by Hubbard
and Love (2000). The average level of family/individual ownership concentration for the
Portuguese companies is the lowest in this subsample at 36.9 percent. We believe that in the case of
Portugal, our assumption that a ‘‘dominant’’ owner is comprised of individuals or a group of
individuals with congruent utility functions became a limitation, and, therefore, the discrepancies in
utility functions resulted in owner(s) focusing on extracting private benefits.
Analysis of the banks’ position in Continental Europe suggests banks no longer comprise the
focal point of the German ownership landscape. However, statistical support was found for the
relationship between ownership and performance when a bank was the dominant owner. Banks in
Continental Europe often provide a variety of services to the same company, which may include
being both a debt and an equity holder, a custodian of the shares of other shareholders (with the
written permission to vote), loan issuers, and finally, governance participants. The variety of
relationships between banks and firms gives them unlimited access to corporate information and
enables banks to play a distinct part in governance (Becht and Boehmer 2003). In this case, a bank
would be interested in the overall cash flow as a debt and equity claimant. We also found significant
negative effects on returns when investor protection laws were strong and significant influence of
the size of assets on performance.
The tests performed for the bank subsample disassembled by country provide statistical support
for the claim that banks, as dominant owners, exercise their monitoring rights in Belgium, France,
and Spain. The results found for Belgium and France suggest little change in the traditional role of
banks in those countries (Van Der Elst 2008). The finding for the Spanish subsample is fully
consistent with the overall result recorded for banks. In both cases, dominant owners (a bank or
other financial intermediary), by their very nature, have the ability to be both equity and debt
providers, and, therefore, have a much higher stake in a firm’s success or failure.
The results of this study may be important for other countries that desire to increase
shareholdings. Certainly, the ownership types we explored in this study and the elements of control
are found in most other countries in the world. Other countries may wish to examine their rules and
regulations concerning dominant ownership and consider whether they are conducive to
encouraging investments. Additional research in other countries is encouraged to determine
whether the results of this study are generalizable.
Despite our efforts to operationalize dominant ownership and make it consistent with interests
arising from cash flow ownership and control rights, our measure remains subject to certain
limitations. The first limitation relates to the assumption that each dominant owner is a homogenous
unit with a congruent set of goals. Realistically, this congruence can be achieved better in the short
run than for longer periods. Second, our measure does not capture the nature of the relationship
when a dominant owner is also a credit capital provider. In this case, expected default costs are
reduced because a dominant owner is interested in the overall cash flow from its debt and equity
claims. A third limitation is that our measure is not sensitive to the distinct role of banks in
Continental Europe, which includes being a debt and an equity holder, a custodian of the shares of
other shareholders (with proxy voting rights), and finally, governance participants, all of which give
them unlimited access to the firm’s corporate information.
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JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH American Accounting Association

Vol. 11, No. 1 DOI: 10.2308/jiar-10214

Dominant Owners and Performance of

Published Online: January 2012

Journal of International Accounting Research

II. THE DOMINANT OWNER AND AGENCY ISSUES

Journal of International Accounting Research

Journal of International Accounting Research

III. HYPOTHESES DEVELOPMENT

Owner Identify and Preferences

Journal of International Accounting Research

Journal of International Accounting Research

Journal of International Accounting Research

IV. VARIABLES IN THE MODEL

Journal of International Accounting Research

Journal of International Accounting Research

Journal of International Accounting Research

Other Significant Owner

Journal of International Accounting Research

Journal of International Accounting Research

Panel B: Firms by Industrial Sector

Journal of International Accounting Research

Panel A: Overall Performance and Ownership (n ¼ 1,533)

Panel B: Institution Dominant Owner Performance and Ownership (n ¼ 1,533)

Panel C: Block Dominant Owner Performance and Ownership (n ¼ 1,533)

Panel D: Bank Dominant Owner Performance and Ownership (n ¼ 1,533)

Journal of International Accounting Research

Panel E: Family/Individual Dominant Owner Performance and Ownership (n ¼ 1,533)

Journal of International Accounting Research

Journal of International Accounting Research

Panel A: Overall Ownership (n ¼ 1,533)

Panel B: Institution Ownership (n ¼ 1,533)

Panel C: Block Ownership (n ¼ 1,533)

Panel D: Bank Ownership (n ¼ 1,533)

Journal of International Accounting Research

Panel E: Family/Individual Ownership (n ¼ 1,533)

Journal of International Accounting Research

Panel A: ROSF to OSOFam/Ind

Panel B: FamIndDom to Growth

Journal of International Accounting Research

Journal of International Accounting Research

Panel A: H1 Overall Ownership and Returns—1,533 Firms

Panel B: H2 Institution Ownership and Returns—222 Firms

(continued on next page)

Journal of International Accounting Research

Panel C: H3 Bank Dominant Ownership and Returns—43 Firms

Panel D: H4 Family/Individual Dominant Ownership and Returns—257 Firms

Panel E: H5 Block Dominant Ownership and Returns—1,010 Firms

Journal of International Accounting Research

Journal of International Accounting Research

Journal of International Accounting Research

Journal of International Accounting Research

Panel A: H2 When Institutions Are the Dominant Owner—222 Firms

Panel B: H3 When Banks Are the Dominant Owner—43 Firms

Panel C: H4 When Families/Individuals Are the Dominant Owner—257 Firms

Panel D: H5 When Blocks are the Dominant Owner—1,010 Firms

Journal of International Accounting Research