1. Controlling Shareholders, Managerial
Ownership and Firm value
— Disentangling Entrenchment from Incentive Effects
and Blockholding from Managerial Effects
∗
Jon Enqvist†
September 20, 2006
Abstract
Using Swedish data I examine the relation between firm value, mea-
sured by Tobin’s Q, and the existence of large controlling shareholders and
their equity ownership. Since a large part of the controlling shareholders
in Sweden also serve as CEOs in their respective firm, I also study what
influences managerial ownership might have on the relation between firm
value and controlling shareholders. I disentangle the negative entrench-
ment effect — as measured as the existence of a controlling shareholder —
from the positive incentive effect — as measured as the controlling share-
holders equity ownership — of controlling shareholders on firm value and
find that these effects increase when the controlling shareholder serve as
CEO in the firm. The findings of this study suggest that the use of dual-
class shares gives large shareholders incentives to expropriate the firm at
the cost of the small shareholders and that the opportunity to expropriate
the firm is bigger when the controlling shareholder also is the CEO.
Keywords: Firm Value; Ownership structure; Incentive effect; Entrenchment
effect; Dual-class shares
JEL-Classification: G32, G34
∗I would like to thank Martin Holmén for all the useful discussions, comments and remarks.
I would also like to thank Jan Södersten for valuable comments. I am greatful to Anders
Anderson for comments at the 2004 Arne Ryde Workshop on Finance on an erarlier version of
this paper. I have also benefited from the remarks and suggestions of David Hillier, Stefano
Caselli, Tim Loughran, Loriana Pelizzon and Huainan Zhao at the 2005 Merton H. Miller
Doctorate Seminar and González Eleuterio Vallelado at the EFMA 2005 Annual Conference.
†Department of Economics, Uppsala University, Box 513, SE-751 20 Uppsala, Sweden, Fax:
+46 18 471 1478, E-mail: Jon.Enqvist@nek.uu.se

2. 1 Introduction
Several papers have empirically studied the relation between the ownership
structure of a firm and its value.1
Anglo-American studies have mainly fo-
cused on managerial ownership and its diverging interest to that of shareholders,
whereas in the rest of the world, the focus has been on controlling shareholders
(CS)2
and their conflicts with smaller shareholders.3
A plausible explanation
for this division is the role of the firm’s management in the different countries.
For example, in the U.S. and the U.K., the CEO is a hired professional ex-
ecutive without majority ownership in the firm. Since ownership is dispersed,
it is difficult to replace the CEO unless there is a takeover. In the rest of the
world however, the CEO is often identical to the controlling shareholder or easily
replaced by the controlling shareholder.
Non-linear relations between managerial ownership and firm value have been
established on U.S. data by e.g. Morck et al. (1988) and McConnell and Servaes
(1990). However, as far as I know little is known about the effect of managerial
ownership in countries such as Sweden, where large controlling shareholders
are common. This paper focuses on the relation between firm value and the
ownership of CSs. It also explores the connection between managerial and CS
ownership. Common for CSs and CEOs is that they have a possibility to affect
firm value - CEOs in their positions as insiders4
and CSs by being in control of
the firm’s board of directors.
In the literature, insider ownership and ownership by large blockholders are
said to have two major effects on firm value; the positive incentive effect [Jensen
and Meckling (1976)] and the negative entrenchment effect [Stulz (1988) and
Shleifer and Vishny (1989)]. The idea of the incentive effect is that the larger
is the insider’s capital in the firm, the more aligned is his interest with that of
other shareholders. And since he is an insider he also has the ability to make
the firm function well. However, the more the insider owns the more entrenched
he becomes. And with entrenchment comes the opportunity to exploit the
firm.5
Hence, an insider with a high voting fraction in the firm — which secures
his position as the largest shareholder — should have a negative effect on firm
value.6
1 See for example Demsetz and Lehn (1985), Morck et al. (1988), McConnell and Servaes
(1990), Himmelberg et al. (1999), Holderness et al. (1999), La Porta et al. (1999), Claessens
et al. (2000) and Demsetz and Villalonga (2001).
2 The expression "controlling shareholder" has many synonyms and similarly expressions
in the literature, e.g. blockholder, controlling minority shareholder and large shareholder.
3 See for example Morck et al. (1988) and McConnell and Servaes (1990) for US results
on managerial ownership, Claessens et al. (2002) for corporate control in Asia and Cronqvist
and Nilsson (2003) for results on blockholders in Europe.
4 In the rest of the paper, I refer to executives within the firm when I use the term insider.
5 The exploitation may take various forms, e.g. inoptimal operating strategies and financial
decisions [Myers and Majluf (1984), Shleifer and Vishny (1989), Burkart et al. (1997) ],
expensive perquisites [Jensen and Meckling (1976)], opposing of hostile takeovers that would
increase shareholders’ wealth [Stulz (1988)] or tunneling of the firm’s resources [Johnson et
al. (2000)].
6 It must be pointed out that it is not the entrenchment per se that has a negative effect
1

3. This paper explores what happens when the cash-flow rights are separated
from the control rights through dual-class shares7
and how this separation affects
the incentive effect and the entrenchment effect. Since most of the firms in
Sweden use dual-class shares with different voting rights, it is an exceptionally
good country for trying to disentangle the entrenchment effect from the incentive
effect.8
These two counteracting effects could result in a non-linear relation between
ownership level and firm value. Morck et al. (1988) found a piecewise linear
relation where firm value increased with managerial ownership from 0 percent
to 5 percent, and decreased between 5 percent and 25 percent. After 25 percent,
firm value increased with managerial ownership. McConnell and Servaes (1990)
found a non-linear relation where the relation first increased and then decreased
after approximately 40% to 50%. At these levels of ownership the manager has
become the CS. Hence, an interesting question given these two results is whether
they capture the effects of managerial ownership or the effects of having a CS.
As mentioned above, this paper will try to separate the effects of these two
forms of ownership.
It is important to make a distinction between CS ownership and managerial
ownership and the effects of the two. CS ownership implies that the owner has
a sufficiently large stake in the firm to be in control of the board of directors.
However, it does not always imply that he is an insider with the ability to affect
the current business of the firm. Studies of managerial ownership, on the other
hand, examine the effects of the ownership of an insider, who has the executive
power to directly affect firm behavior, but who does not always own a sufficiently
large stake in the firm to control the board of directors. In this paper, I compare
the effects of CSs with those of CSs who are also the CEO of the firm. In the rest
of the paper, these will be refered to as controlling managers (CMs). Sweden
is a suitable country for studying these effects; not only does most of the firms
have a CS but, in addition, a large share of those are also a CM; 80 percent of
the firms in the data have a CS and 18 percent a CM. Thus, almost 25 percent
of the CSs are also the CEO.
To explore these issues panel data consisting of 203 publicly traded Swedish
firms are used. The data stretch from 1985 to 2000, even though they are
not completely balanced since all firms have not been listed during the entire
period. In total, the data consist of 1754 firm-year observations and include
both accounting data and ownership data. An advantage in doing this study in
Sweden is the good reliability of the accounting data. In La Porta et al. (1998),
Sweden gets the highest rating on the accouting standards among 49 examined
countries.
on firm performance, but the opportunity the owner gets to exploit the firm. The more secure
the owner is in his position as largest shareholder, the greater is the opportunity to maximize
his own utility at the cost of outside shareholders.
7 Cash flow rights and control rights can also be separated through pyramid ownership or
cross-holdings. See e.g. Bebchuk et al. (2000) for an exposition of these mechanisms.
8 78 percent of the firms in the data use dual class shares. Also, according to La Porta et
al. (1999), Sweden has the largest deviation from one-vote-one-share in the world.
2

4. The ownership data give us both the voting rights and the equity share held
by the largest shareholder and the CEO. It also gives us the opportunity to
distinguish the type of the largest shareholder — whether it is a foundation,
family, institution, etc.
I first document a negative relation between firm value — measured by an
approximation of Tobin’s Q — and the existence of a CS by using a dummy that
equals one if there exists a CS and zero otherwise. In this paper, I define a CS
as the largest shareholder owning more than 25 percent9
of the firm’s voting
rights. This negative relation diminishes with his equity share, however. My
interpretation is that the existence of a CS captures the negative entrenchment
effect since it tells us that there exists a shareholder with a secure position in
the firm with the possibility to expropriate the firm. Furthermore, I interpret
the positive relation between firm value and the CS’s equity ownership as a
positive incentive effect, since the more capital the CS has invested in the firm,
the higher are his incentives to make the firm perform well.
Then, I establish that there exist a relation between firm value and CEO
ownership.10
This result suggests that managerial ownership also has effects11
on firm value in a country such as Sweden where large blockholders are frequent.
This relation between firm value and CEO ownership raises the question whether
the relation between firm value and CSs to some extent is not affected by the
large part of CSs that also serve as CEOs (CMs). By separating the CMs
and their equity fraction from the CSs and their equity fraction I also confirm
that the relation between firm value and CSs seems to stem from managerial
ownership effects.
Despite the fact that this subject field has been studied in several papers over
the last decades, I believe this paper to have some contributions to the insight
into how ownership structure relates to firm value. There are two papers closely
related to this paper; Cronqvist and Nilsson (2003) and Claessens et al. (2002).
The crucial difference from Cronqvist and Nilsson (2003) is that the dummy
effect of having a CS has been separated from the continuous ownership level
variable. Thus, it is possible to distinguish two effects from ownership. The
dummy and the continuous variables are obviously strongly correlated but nev-
ertheless, they are interpreted to explain two contradicting effects; the entrench-
ment effect and the incentive effect discussed above. The dummy is supposed
to absorb the entrenchment effect since it is the variable explaining whether
the owner is a CS and hence, an entrenched owner. The shareholder’s equity
fraction, on the other hand, provides the information about in what grade his
9 The 25 percent limit is used simply because Swedish tax regulation define a "main owner"
(huvuddelägare) as someone who alone or together with family ownes more than 25 percent
of the control rights. And as such, you are treated differently according to the law. Cronqvist
and Nilsson (2003), which my paper to large extent is closely related to, also use the 25 percent
limit.
10 The result holds when either equity or vote fraction is used as a measure of ownership.
11 The word effect should be used with some care, since fixed effects regressions cannot say
anything about the causality - they only establish whether there is a relation. Whether the
ownership level affects firm performance or vice versa is purely speculation. That is why I say
that the result only suggest an effect.
3

5. interests are converged with those of other shareholders and hence, it absorbs
the incentive effect.
This way of using the equity fraction to capture the incentive effect was also
used in Claessens et al. (2002) when they separated the incentive effect from the
entrenchment effect. However, in their paper they did not include a CS dummy
to capture the entrenchment effect. Instead they used the largest shareholder’s
difference between control rights and cash-flow rights. They also used a sample
cut-off point at 10 percent. My belief, however, is that the 25 percent level
used in this paper and earlier in Cronqvist and Nilsson (2003) is better suited
when looking at CSs in Sweden. A more complete review of Claessens et al.
(2002) and Cronqvist and Nilsson (2003) is given in Section 2 along with some
other important papers. As a robustness test, I also try to replicate some of the
regressions in Claessens et al. (2002) and Cronqvist and Nilsson (2003). These
results are presented in Section 6.
The rest of the paper is organized as follows. The second chapter gives a
literature review on some of what is written about managerial ownership and
CSs. Then, my hypotheses are given in Section 3, followed by a section de-
scribing the data, variables and empirical framework. The results are presented
and discussed in Section 5 followed by Section 6, where I conduct a number of
robustness tests on my results. Section 7 ends this paper with a summary and
concluding discussion.
2 Literature Review
Since Berle and Means (1932) enlightened the problems with the separation of
control and ownership in a firm, several papers have been written on the subject.
Common for these studies is that they look at how ownership structure affects
firm behavior. The focus has mainly been on two separate forms of ownership,
managerial ownership and the ownership of CSs.12
In this section, some of the
most essential papers in these areas are discussed. I have chosen to first look at
the literature on managerial ownership and then that on CSs.
2.1 Managerial Ownership
2.1.1 Theory
The agency problem induced by the separation of ownership and management
of the firm was enlightened by Berle and Means (1932) and has since then
constituted the basis of most research in this field. In their book, they argued
that when control is separated from ownership, there is a divergence of interest
between the two. Corporate stockholders want to maximize the corporate profit,
whereas the manager aims at maximizing his personal profit. They also conclude
12 Other forms of ownership centered upon in the literature that are worth mentioning is e.g.
family or founder ownership [Anderson and Reeb (2001), Faccio and Lang (2002) and Burkart
et. al. (2003)]. These forms of ownership are connected to both controlling and managerial
ownership.
4

6. that "the interests of control are different from and often radically opposed to
those of ownership".
Jensen and Meckling (1976) based a theory on this principal-agent problem;
the agent (manager) does not always behave in the principal’s (shareholder’s)
interest, which induces agency costs in a firm. Their idea was that the value
of the firm depends on the relative amount of shares owned by insiders and
outsiders13
in the firm. Their theory was that if the agent also becomes the
principal — if the manager owns 100 percent of the firm — he will also get the
incentives for profit-maximizing behavior. Hence there is a positive incentive
effect of managerial ownership; the higher share the manager owns in the firm,
the better is the firm value.
Stulz (1988) studied the relation between firm value and managerial own-
ership from another perspective and therefore came to another conclusion. He
argued that the only reason for managers to own voting rights is to "affect the
behavior of potential bidders and hence the probability of losing control". By
increasing their fraction of voting rights, managers reduce the risk of a hostile
takeover which decreases the value of the firm. However, an increase in their
owned fraction also increases the premium offered in case of a takeover. Taking
these two effects together, it should be possible to find a fraction owned by the
management that maximizes the firm value.
Shleifer and Vishny (1989) shed light on the entrenchment effect showing
that there are not only positive effects of managerial ownership. Like Berle
and Means (1932) and Jensen and Meckling (1976), they based their model
on the principal-agent problem between owners and managers. In their model,
managers take measures to make them hard to replace. By e.g. making implicit
rather than explicit contracts and doing manager-specific investments, the man-
ager makes himself too valuable and costly for the firm to replace.
2.1.2 Empirics
The theory of Berle and Means (1932) was called in question when Demsetz
and Lehn (1985) examined the relation between ownership structure and the
profitability of the firm. Their main idea was that ownership structure is an
endogenous outcome of the maximizing process. They argued that in every
decision concerning a change in the ownership level, the shareholder has to
consider its consequences on the profit rate, i.e. every change in ownership
level is made to maximize the shareholders’ profit. Consequently, ownership
concentration and profit rate should be unrelated.
The counteracting forces of the incentive effect and the entrenchment effect
constituted the main theme of the piecewise linear OLS regressions tested by
Morck et al. (1988). On 371 of the Fortune 500 firms they found a piecewise
linear relation between managerial ownership and Tobin’s Q, where firm value
increased with managerial ownership from 0 percent to 5 percent, decreased
between 5 percent to 25 percent and after 25 percent, the firm value increased
13 They defined insiders as management and outsiders as investors with no direct role in the
management of the firm.
5

7. with managerial ownership. Their interpretation was that the negative entrench-
ment effect becomes significant at 5 percent managerial ownership, but that the
marginal effect after 25 percent ownership is on a large scale zero whereas, in
contrast, the positive incentive effect operates throughout the whole range of
ownership.
Moreover, McConnell and Servaes (1990) used Tobin’s Q as a measure of
firm value. They used data of around 1000 American firms in two different years
to establish a relation between the managerial equity fraction owned in firms
and Tobin’s Q. Consistent with the theories of the relation between managerial
ownership and firm value of Stulz (1988), the results showed a curve-linear
relation with a maximum at 40 to 50 percent. McConnell and Servaes tested
the regressions used by Morck et al. (1988) on their data, but were not able to
replicate their results.
In later years, the focus in this field has been on enhancing the econometric
methods to study the relation between managerial ownership and firm value.
Himmelberg et al. (1999) re-examined the cross-sectional results of Demsetz
and Lehn (1985), Morck et al. (1988) and McConnell and Servaes (1990) using
panel data. They argue that the fixed effect must be used when examining the
impact of managerial ownership on firm value to get hold of unobserved firm
heterogeneity. Using fixed effect and also including a number of firm charac-
teristic control variables, they find no exogenous effect in the regressions used
by Demsetz and Lehn (1985), Morck et al. (1988) and McConnell and Servaes
(1990). Their conclusion was that the results of these previous studies come
from a spurious correlation between managerial ownership and firm value.
As a response to Himmelberg et al. (1999), Zhou (2001) argued and showed
the year-to-year changes in managerial ownership to be small and that they
should not affect within-year changes in firm value. If the contracting environ-
ment in a firm is relatively constant over time, there should not be any reason
for the manager to change his effort. Therefore, Zhou argues that when "Re-
lying on within variation, fixed effects estimators may not detect an effect of
ownership on value even if one exists".
To understand what forces drive the changes in managerial ownership, Hold-
erness et al. (1999) compared the ownership level by officers and directors in
1935 and 1995. This long-term comparison also gave them the opportunity to
examine the relation between firm value and managerial ownership by replicat-
ing the piecewise linear regression by Morck et al. (1988). Even though average
managerial ownership has increased from 13 percent in 1935 to 21 percent in
1995, they found no evidence of this being explained by the relation between
firm value and managerial ownership.
2.2 Controlling Shareholders
A CS does not necessarily mean a majority shareholder. It could also be a
shareholder with a sufficiently large share in the firm to secure his position as
the largest shareholder. According to Weston (1979), the chances of a hostile
takeover becomes impracticable at 30 percent insider ownership and most liter-
6

8. ature refers to a CS as 10-30 percent ownership.14
As a CS, one also controls
the board of directors and therefore has indirect control of the firm. Hence, a
CS may generate both positive and negative effects in a firm.
2.2.1 Theory
Fama and Jensen (1983a) connected the theories of managerial ownership and
ownership of CSs. They concluded that if a concentrated group of individuals
— especially if these are managers — own a high fraction of the firm, these have
both the possibility and the incentive to expropriate the firm at the expense
of the other shareholders. Hence, by concentrating control and management to
a few agents, the residual claims also become restricted to these agents, which
implies there to be a negative effect of CSs, and CMs in particular.
With a dispersed ownership in a firm it is unlikely that a single shareholder
would have the incentive to monitor the management. Shleifer and Vishny
(1986) argued that a large shareholder was a possible solution to this free-rider
problem [Grossman and Hart (1980)]. With a high residual claim in the firm,
the large shareholder may have both the incentives and means to monitor the
firm and to initiate a takeover of the management if displeased with the present
one.
Zingales (1994) studied the phenomenon of the large premium attributed to
voting shares. His conclusion was that the magnitude of the premium must be
explained by potential private benefits from being in control of a firm; there is
no reason to be a large blockholder unless there is a personal benefit from it.
The consequence of this conclusion is that CSs are associated with a negative
effect on the profitability of the firm.
2.2.2 Empirics
Holderness and Sheehan (1988) made a comparison between firms with majority
shareholders (50.1 percent ownership or more) and firms with dispersed own-
ership (defined as firms with no shareholders owning more than 20 percent of
the shares) and their effect on Tobin’s Q. Among firms traded on NYSE and
AMEX over the years 1978-1984 they selected 114 majority owned firms and
found no difference in Tobin’s Q between those firms and those with dispersed
ownership. They found this result to be inconsistent with the proposition that
majority shareholders use their position to expropriate firm resources [Fama and
Jensen (1983a)]. In their paper, they also raised the possibility that different
types of majority owners might have different motivations for their ownership.
With the starting point that families are an important and prevalent investor
group in the U.S., Anderson and Reeb (2001) examine the effects of founding-
family ownership on ROA and Tobin’s Q, using Standard & Poor’s 500 firms
during the period 1992-1999. In their regression analysis, they used a two-way
fixed effects model. Inconsistently with Holderness and Sheehan (1988), their
result show that firms perform better (using ROA as the dependent variable)
14 A relevant fact is that in Sweden, it only takes a ten-percent ownership to stop a takeover.
7

9. or at least as well (using Tobin’s Q as the dependent variable) when family
members serve as CEO as when an outsider is hired as CEO.
Claessens et al. (2002) was the first paper empirically trying to disentangle
the incentive effect from the entrenchment effect. They used a data consisting
of 1301 firms in eight different East Asian economies in the year 1996. The two
main independent variables in their regressions were the largest shareholder’s15
share of cash-flow rights, Ownership, and the share of voting rights minus the
share of cash-flow rights, Control minus ownership. The first variable is sup-
posed to capture the incentive effect, since the owner’s interests converge with
those of the firm, the higher is the share of cash-flow rights in the firm. The
second variable shows to what degree the largest owner uses high-voting shares
to gain control of the firm. Hence this variable should capture the entrenchment
effect.
As I can see, there are some minor weaknesses in Claessens et al.´s empirical
model. The first is that even though the Control minus ownership variable only
captures the entrenchment effect, the variable Ownership does not only capture
the incentive effect, but also some of the entrenchment effect. The entrenchment
effect does not only depend on to what degree high voting shares are used to gain
control, but also on what level of ownership is held by the largest shareholder.
This could lead to an under-estimation of the incentive effect.
Like Claessens et al. (2002), Cronqvist and Nilsson (2003) looked at the
effects of the largest shareholder’s ownership in the firm and the separation
between ownership and control. More explicitly, Cronqvist and Nilsson looked
at how the CS’s16
vote ownership and his excess votes17
affect Tobin’s Q. Using
fixed firm effects regressions on a panel of 309 Swedish firms during 1991—1997,
they found the agency costs associated with CSs to rather be due to the CS’s
control rights than his excess votes. They also pointed out that families have
more negative effect on Tobin’s Q than other ownership categories and that
they are more likely to use dual-class shares to gain control over the firm with
a minority equity ownership.
More comments on Claessens et al. (2002) and Cronqvist and Nilsson (2003)
are made in Section 6, where some of their empirical models are replicated.
3 Hypotheses
Based on the theories and empirical results of the papers discussed in the previ-
ous section, I will now outline my hypotheses regarding the connection between
CS ownership and managerial ownership and their relation to firm value.
My first hypothesis concerns the connection between firm value and CSs.
Corporations in Sweden are often run by a large shareholder controlling the
15 They used a cut-off point at ten percent of the voting rights.
16 Cronqvist and Nilsson also used 25 percent ownership of the control rights as definition
of a CS. However, they used the term Controlling Minority Shareholder since they wanted to
focus on the CSs that only own a minority of the cash flow rights.
17 Excess votes calculated as (vote ownership/equity ownership - 1).
8

10. firm and setting the agenda for its business. By definition, a CS has a secure
position in the firm — having a high fraction of control rights in the firm, the
shareholder entrenches himself. This entrenchment gives him the opportunity
of expropriating the firm [Stulz (1988), Shleifer and Vishny (1989) and Burkart
et al. (1997), Gompers et al. (2003)]. Hence, my first hypothesis is:
Hypothesis 1: The existence of a controlling shareholder is neg-
atively related to firm value.
It should be stressed that it is not the entrenchment in itself that is supposed
to have a negative effect on firm value but rather the opportunity given for
expropriation of the firm.
The second hypothesis also concerns the connection between firm value and
CSs. But when the first hypothesis is based on the existence of a CS — which,
in turn, is based on the largest shareholder’s control rights — this hypothesis
concerns the CSs cash-flow rights. As pointed out by Shleifer and Vishny (1986),
the larger are the CS’s cash-flow rights in the firm, the higher a share of the
costs does he pay and hence, the larger are his incentives to maximize firm value.
From this argument, I state my next hypothesis:
Hypothesis 2: Given the existence of a CS, his equity fraction is
positively related to firm value.
It is important to make the distinction between Hypotheses 1 and 2; the
first hypothesis is based on a certain level of control rights which is supposed
to capture the negative entrenchment effect whereas the second hypothesis is
based on cash-flow rights which is supposed to capture the positive incentive
effect.
Unlike the first two hypotheses the third hypothesis is not solely about the
connection between CSs and firm value but also about the connection between
managerial ownership and CS ownership.
In a country such as Sweden where firms are, to a large extent, dominated
and controlled by large shareholders, it is called into question whether studying
managerial ownership and its influence on firm value is useful. However, since
almost 25 percent of the CSs also act as CEOs in their firms and that, in their
role as insiders, CEOs have greater opportunities to affect firm value than other
shareholders [La Porta et al. (1999)], it must also be of interest to study the
relation between firm value and managerial ownership in Sweden. Whether
the relation between firm value and managerial ownership is positive [Jensen
and Meckling (1976)], negative [Stulz (1988) and Shleifer and Vishny (1989)],
quadratic [Stulz (1988) and McConnell and Servaes (1990)], piecewise linear
[Morck et al. (1988)] or in the form of a double humped curve [Davies et al.
(2005)] in Sweden is not for this paper to establish, but a task for future research.
9

11. In this paper I will only confirm that there is a relation between the two before
looking at the connection between managerial ownership and CS ownership and
their relation to firm value.
So, what then happens if the CS is also CEO in the firm? A CM has more
insights into the firm and direct power than other CSs to run the firm in the
direction he wants. Hence, he is likely to have a stronger effect on the value of
the firm, whether it is a negative or positive effect. This leads us to the final
hypothesis:
Hypothesis 3: The magnitude of Hypotheses 1 and 2 increases if
the CS is a CEO.
My hypothesis is hence that if there exists a CS in a firm, this should be
negatively related to firm value but if this CS is also a CEO, this negative
relation should be even larger. Moreover, given the existence of a CS, his equity
share in the firm is positively related to firm value — the more capital invested
in the firm, the more positive is the relation — and if the CS also is a CEO, this
positive relation between firm value and equity share should be even bigger.
4 Construction of Data, Variables and Empiri-
cal Framework
4.1 Construction of Data
The sample consists of accounting data as well as ownership structure data
of 203 large Swedish non-financial firms over the period 1985-2000. Due to
bankruptcies, mergers, takeovers and the fact that some of the corporations
become listed after 1985, the panel data are not balanced; some firms only
have three observations while other firms are included in all 16 year observa-
tions. In total, the data consist of 1754 firm-year observations. The data are
from two sources; the accounting data from "Findata Trust" whereas the own-
ership structure data are collected from "Owners and Power in Sweden’s Listed
Companies" by DN Ägarservice [Sundqvist (1986-93) and Sundqvist and Sundin
(1994-2001)]. The ownership structure data report the 25 largest holders of con-
trol rights and therefore, the ownership of a possible CS. If the CEO is among
the 25 largest shareholders, his ownership is also given. A small, yet factual
problem is that the ownership of managers with a smaller ownership than the
25th largest shareholder is not available and hence, is approximated to zero.18
A great advantage of the data is that they include both the equity fraction
and the vote fraction. Since so many firms in Sweden use dual-class shares,
the equity fraction and the vote fraction differ most of the time.19
Hence, it
18 This is not a severe problem since it never happens that the actual ownership level of the
26th largest shareholder exceeds one percent.
19 In our data, 78.3 percent of the firm-year observations use dual-class shares.
10

12. does not only give us the opportunity to study both the relation between firm
value and CS ownership and managerial ownership, respectively, but also the
distinction between the relation between firm value and equity ownership and
vote ownership, respectively. In this paper I will use these relations to separate
the entrenchment effect from the incentive effect.
A problematic issue when constructing the ownership data is how to define
the owner. An owner need not be an individual but could also be for example
another corporation, a union or other organization. In this paper I will also
treat families as a single unit, e.g. if there are three family members owning ten
percent each of a firm’s cash-flow rights they will be treated as a single owner
with 30 percent of the cash-flow rights in the firm.
Another problem when constructing the data is how to deal with cross-
holdings and pyramid ownership. In this paper, I will not consider these means
of separating votes from capital. Instead, I will focus on dual-class shares since it
is the easiest way of separating votes from capital [Holmén and Högfeldt (2004)].
In these data, I will treat a person A who is the CS of a firm B who, in
turn, is the CS of firm C as the CS of firm C. For example, in 1997, the Paulson
family owned 59.6 percent of the votes in the firm Peab, which makes it the CS
of Peab. Peab, in turn, owned 34.1 percent of the votes in the firm BPA, which
makes the Paulson family the CS of BPA since it is the CS of Peab which, in
turn, is the CS of BPA.
However, the results could be biased by not considering pyramid ownership.
In the above example, the Paulson family owns 18.9 percent of the equity in
Peab and Peab owns 21.6 percent of BPA. In reality, the Paulson family therefore
owns 18.9%·21.6% ≈ 4.1% of the equity whereas the data will make it seem like
the controlling owner of BPA owns 21.6 percent of the equity, i.e. if there is a
positive incentive effect the data will make it look smaller. The entrenchment
effect will not be biased, however. The Paulson family only owns 34.1%·59.6% ≈
20.3% < 25% which would not make it CS of BPA. However, since it is in control
of Peab which, in turn, is in control of BPA, the Paulson family is still in effective
control of BPA.
4.2 Variables
Empirical papers on ownership structure and its influence on firm value almost
exclusively use Tobin’s Q as the dependent variable. An alternative measure is
the return on assets (ROA). In this paper I use an approximation of Tobin’s
Q as a measure of firm value, measured as the ratio between the book value of
total debt plus the market value of equity and the book value of total assets.20
However, as a robustness test, all regressions in Section 4.3.1 will also be made
using ROA as the dependent variable. These results will be discussed in Section
6, Robustness Tests.
The use of Tobin’s Q is not entirely unproblematic. Even though it is almost
indisputable as a measure of firm value, there might arise severe measurement
20 See e.g. Adams and Santos (2004) and Cronqvist and Nilsson (2003) for similar approxi-
mations of Tobin’s Q.
11

13. errors in constructing the variable. Perfect and Wiles (1994) showed that both
the mean and the variance are very sensitive to the method used when approx-
imating Tobin’s Q. However, they also pointed out that if changes in Tobin’s Q
are studied — which is the case in my paper — there is no significant divergence
between the different estimates.
Furthermore, as seen in Table 1, there is an obvious skewness in Tobin’s Q;
the mean is 1.51 whereas the median is 1.13.21
To deal with this problem, I
will use the natural logarithm of Q as my measure of firm value [Allayanis and
Weston (2001)].
As expected, the CSs have a much higher vote share (mean 54.1%) than
equity share (mean 35.6%), which tells us that CSs, to a large extent, use A-
shares to gain control of the firms. An interesting fact is also that CMs are
even more eager to use A-shares than other CSs — the average CM has a vote to
equity ration of 1.62 (median 1.85) whereas the ratio for all CSs is 1.52 (median
1.54).
A number of firm characteristics will be included as control variables in all
regressions to capture observable firm heterogeneity. These control variables
are similar to those used in e.g. Claessens et al. (2002) and Cronqvist and
Nilsson (2003). The included control variables are ln(Firm size), Leverage,
Sales to total assets ratio, PPE to total assets ratio, Investments to total assets
ratio and ln(Age).22
Firm size is measured as the book value of total assets.
Leverage is the book value of debt to book value of total assets ratio. The
variables leverage, sales to total assets ratio and PPE to total assets ratio are
the same as those used by Cronqvist and Nilsson (2003) and since my data are
partly the same as theirs, it is not surprising that my descriptive statistics looks
similar to theirs. Investment to total assets ratio is supposed to correspond to
Cronqvist’s and Nilsson’s CAPEX/Total assets. ln(Firm size) and ln(Age) are
used as control variables in e.g. Claessens et al. (2002).
To see if there is a difference in mean or median between the sample with
CSs and that without CSs, t-tests and Wilcoxon tests are made on each variable.
In the Descriptive Statistics table below, it can be seen that ln(Firm size) and
Investments to total assets ratio are the only two variables where no significant
differences between the two sub-samples are established. This gives even more
incentives to study the CS phenomenon in Sweden.
[Insert Table 1 about here]
21 Moreover, a Bowman-Shelton test for normality strongly indicate a skewness in Tobin’s
Q.
22 As a robustness test I also included a dummy that equals one if there exist a shareholder
beside the CS who owns more than 10 percent. This variable would capture the effects of
having a shareholder threatening the CS’s controlling position. However this variable does
not affect the results to any appreciable extent and in order to use the control variables used
in Cronqvist and Nilsson (2003) as much as possible I have chosen not to include it in the
reported regressions.
12

14. 4.3 Empirical Framework
In this part of the paper the empirical frameworks are given for the hypotheses
stated in Section 3. The empirical frameworks used in this paper are mainly
based on the papers discussed in the literature review.
As stated above, similar to most modern studies of the relation between
ownership structure and firm value, an approximation of Tobin’s Q will be used
to represent firm value [Morck et al. (1988), Holderness and Sheehan (1988),
McConnell and Servaes(1990), Himmelberg et al. (1999), Anderson and Reeb
(2001), Claessens et al. (2002) and Cronqvist and Nilsson (2003)].
The major problem when considering the relation between firm value and
ownership structure is how to deal with endogeneity problems. Since Demsetz
(1983), the exogeneity of the ownership variable has been in question when con-
sidering regressions with firm value as the dependent variable and ownership
as the explanatory variable. Endogeneity problems may appear in the form of
reverse causality or unobservable variables affecting both firm value and owner-
ship structure. Himmelberg et al. (1999) emphasized the problem of unobserved
heterogeneity generating endogeneity problems in the form of spurious correla-
tion between ownership and Tobin’s Q. Unobserved heterogeneity comes in the
form of firm characteristics in the firm’s contracting environment which are un-
observable for the econometrician. However, Himmelberg et al. argue that since
"unobserved sources of firm heterogeneity are relatively constant over time, we
can treat these unobservable variables as fixed firm effects, and use panel data
techniques to obtain consistent estimates of the parameter coefficients". There-
fore, I will — analogously to e.g. Himmelberg et al. (1999) — use fixed firm effects
estimations on the panel data, allowing each firm to have its own intercept in
the regressions. Each intercept will then absorb unobserved heterogeneities.
Year dummies will be included in the fixed firm effects regressions to allow time
variations within firms [Zhou (2001)].
To confirm that there is correlation between the regressors and the firm-
specific effects, Hausman tests are made on all regressions. As seen in Tables
2-4 presented in Section 5, tests on all regressions reject the null-hypothesis
of zero correlation between regressors and firm-specific effects. I also run a
F-test on all regressions, which confirms that the fixed firm effects are jointly
significant.
An alternative and probably better method for dealing with the endogeneity
problems would be to use the instrumental variables (IV) method [Adams et
al. 2003)]. The IV method would not only consider the unobservable variables
that create spurious correlation between Tobin’s Q and the ownership variables,
it would also consider reversed causality. However, due to lack of good instru-
ments, the IV method is not suitable for this study.
If e.g. OLS had been used, I could only have seen how different levels of
ownership were related to firm value. But by using fixed firm effects with year
dummies, I get the opportunity of studying how ownership structure changes in
each firm are related to firm value. An alternative method could have been using
OLS and including industry dummies [Claessens et al. (2002)]. However, then
13

15. I would still have looked at how different levels of ownership are related to firm
value and not how changes in ownership are related to firm value. However,
fixed firm effects regressions contain more information since the firm specific
effects not only include the same information as the industry dummies but also
other firm heterogeneities not included as independent variables.
There are some problems though, using fixed effects regressions. One of
the problems is that — even though unlike OLS, it deals with the problem of
omitted variables affecting both Tobin’s Q and the explanatory variables — it
does not deal with the problem of reverse causality. Therefore, I cannot draw
any conclusions on whether it is the ownership structure that affects Tobin’s Q
or if it is Tobin’s Q that affects the ownership structure. When the fixed effect
method is used, I can only establish a relation without being able to determine
its causality. Obviously, this will make the conclusions of this paper somewhat
weaker than they would have been using e.g. the IV method.
Using a simultaneous regression model on American data, Cho (1998) showed
that firm value affects managerial ownership, rather than the opposite. However,
reverse causality is less likely in my study compared to e.g. studies on managerial
ownership in the U.S. In contrast to Swedish CSs and CMs, the U.S. manager’s
equity ownership is often earned as compensation to converge the manager’s
interests with those of the shareholders. Therefore Tobin’s Q could have a
positive effect on managerial ownership in the U.S. Moreover, this argument is
consistent with the results of Kvist et al. (2004). Using Granger tests they
find no significant effect of block ownership on firm value in Anglo-American
economies, but a significant negative effect of block ownership on firm value in
Continental Europe.
4.3.1 Regressions
The first hypothesis to be tested is that the existence of a CS is negatively
related to firm value. My definition of a CS is “the largest shareholder that
owns more than 25 % of the control rights”. Hence, I construct a dummy
that equals one if there exists a shareholder owning more than 25% of the
control rights and that equals zero otherwise. Since this dummy is supposed
to capture the entrenchment effect I simply call the dummy entrenchmentcs
it .
Beside the dummy, the control variables discussed above as well as year dummies
are included in the regression. Thus, Hypothesis 1 is tested using the following
regression:
ln(Qit) = β1entrenchmentcs
it + β2−7controlsit + ui + εit (1)
i = 1, ..., 203, t = 1, ..., Ti
In this regression and those that follow, ui is the fixed firm effects, i.e.
the firm-specific intercepts which is supposed to capture the unobserved firm
heterogenity. εit is the error term. If my hypothesis is correct β1 is supposed
to be negative since the dummy, entrenchmentcs
it , is supposed to capture the
negative entrenchment effect of having a CS in the firm.
14

16. The second hypothesis states that “given the existence of a CS, his equity
fraction is positively related to firm value”. To test this hypothesis I use Regres-
sion 1 but also add the eventually existing CS’s equity fraction as a measure of
incentive. Hence, I call this variable incentivecs
it . This is a continuous variable
which goes from 0 to 100 percent. The regression then looks as follows:
ln(Qit) = β1entrenchmentcs
it + β2incentivecs
it
+β3−8Controlsit + ui + εit (2)
i = 1, ..., 203, t = 1, ..., Ti
The interpretation of the regression is then that if there is no CS, the en-
trenchment dummy as well as the continuous incentive variable will be zero.
However, if there exists a CS, the entrenchment dummy will be one and its
coefficient, β1, is expected to be negative. The continuous incentive variable on
the other hand will be above zero and below 100 percent and its coefficient, β2,
will be positive if the hypothesis is correct.
Before proceeding to the empirical framework for Hypothesis 3, which con-
nects managerial ownership with CS ownership, I first want to certify that there
is a relation between firm value and managerial ownership at all. For this pur-
pose, I have, in this paper, chosen to run four regressions with Tobin’s Q as
the dependent variable and the CEO’s ownership as the explanatory variable;
two linear and two quadratic regressions. The reason why I run two each of the
linear and the quadratic regressions is that it is not obvious whether I should
use the CEO’s control rights or cash-flow rights as a measure of the CEO’s own-
ership. In the literature both have been used, e.g. Cronqvist and Nilsson (2003)
use control rights whereas Claessens et al. (2002) use cash-flow rights. Since I
have access to both, I will also use both. The regressions used to test whether
there is a relation between Swedish CEOs’ ownership and firm value then looks
as follows:
ln(Qit) = β1ownershipit + β2−7controlsit + ui + εit (3)
i = 1, ..., 203, t = 1, ..., Ti
and
ln(Qit) = β1ownershipit + β2(ownershipit)2
+β3−8controlsit + ui + εit (4)
i = 1, ..., 203, t = 1, ..., Ti
If β1 in Regression 3 is significant or if β1 and/or β2 in Regression 4 is
significant, I interpret this as the relation between firm value and CEO owner-
ship being confirmed. Regression 4 is — beside the control variables, the year
15

17. dummies and the fixed firm effects — the very same regression as that used in Mc-
Connell and Servaes (1990). They found a reversed U-shaped relation between
firm value and managerial ownership. However, they looked at the ownership
of the board of directors and not at the ownership of the single CEO, which is
the case here.
Now that the framework for both CSs and managerial ownership is con-
structed I will turn to the last hypothesis, Hypothesis 3, which connects CS
ownership with managerial ownership. The third hypothesis is that the mag-
nitude of Hypotheses 1 and 2 increases if the CS is a CEO. So, besides the
variables included in Regression 2, I also include a dummy, entrencmentcm
it ,
which equals one if there exists a CM, i.e. a CS that is also the CEO of the
firm, and this CM’s equity fraction, incentivecm
it :
ln(Qit) = β1entrenchmentcs
it + β2entrencmentcm
it + β3incentivecs
it
+β4incentivecm
it + β5−10controlsit + ui + εit (5)
i = 1, ..., 203, t = 1, ..., Ti
If Hypothesis 3 is correct, β1 will be negative but β2 even more negative.
β3 will be positive, but β4 even more positive. When the dummies are equal to
one, the shareholder has entrenched himself and become a CS. This gives him or
the opportunity to consume corporate wealth without stigmatization, thereby
reducing the firm value and hence, Tobin’s Q. If the controlling owner is also
a manager, he is supposed to put in more human capital in the firm, thereby
augmenting the entrenchment effect. This implies an even stronger negative
entrenchment effect on Tobin’s Q.
The shareholders’ equity percentage is supposed to have a positive sign to
support the hypothesis, however. As the CS’s equity fraction increases, his
interest converges with those of the firm. If the controlling owner is a manager,
he is also supposed to have the executive power to run the firm closer to his
preferences. Therefore, a CM’s equity ownership should increase firm value even
more than an outsider CS’s equity fraction.
The dummy variable of the owner’s voting rights and the continuous variable
of the owner’s equity share are, of course, highly correlated. If the voting rights
increase, so does the equity share. This multicollinearity could induce some
problems with inefficient estimates. These problems appear in the form of high
R2
-values but insignificant t-ratios. However, as seen in Tables 2-4 in Section
5, there seem to be no noticeable problems with multicollinearity.
5 Results
In this section I present and discuss the results of all regressions presented in
Section 4.3.1. I start by presenting the results of Regression 1 which tests
Hypothesis 1. Table 2 shows Tobin’s Q to be significantly lower when a firm has
a CS. The table also shows the drop to be of economic significance; the value
16

18. of Swedish firms drops by 7.0 percent when the firm is controlled by a large
shareholder. These findings are consistent with e.g. Holderness and Sheehan
(1988).
The next regression to be tested is Regression 2 which looks like Regres-
sion 1 but the CS’s equity fraction has also been included. Regression 2 tests
Hypothesis 2, i.e. given the existence of a CS, his equity fraction is positively
related to firm value, i.e. the CS dummy is supposed to capture the negative
entrenchment effect whereas his equity fraction is supposed to capture the pos-
itive incentive effect. And as seen in Table 2, the results support hypothesis 2.
For every additional percent of the firm’s equity fraction owned by the CS, firm
value increases by 0.2 percent which is quite substantial. It is also noteworthy
that when adding the CS’s equity fraction into the regression, β2 goes from -7.0
percent in Regression 1 to -12.4 percent in Regression 2.
My revision of the regressions used in Cronqvist and Nilsson (2003) has
confirmed the negative effect of having a CS found by them. But by separating
the existence of a CS from his equity fraction owned, I have also shown that
there might be a positive effect of CS ownership. Moreover, at a first glance,
these results might seem to differ from those of Holderness and Sheehan (1988),
i.e. that majority owners do not have a different effect on firm value than firms
with dispersed ownership. It must be considered, though, that they considered
majority owned firms (50.1 percent or more), excluding those firms with owners
that have the most negative effect on Tobin’s Q; those with enough shares to
control the firm (25 percent ownership), but yet not any considerable cash-flow
rights which would give them incentives to make the firm perform well.
[Insert Table 2 about here]
Comments on Regressions 1’ and 2’ in Table 2 will be made in Section 6,
Robustness Tests.
Now that I have looked at the relation between firm value and CSs and
their ownership, I turn to see whether there is a relation between firm value
and managerial ownership. I am interested in whether firm value is in someway
related to CEOs’ ownership in Swedish firms. If this is the case, it is also likely
that the large part of the CSs that are also CEOs in some way has effects on
the results when studying the relation between firm value and CSs. Regressions
3 and 4 are used to establish whether there is any relation between firm value
and managerial ownership.
As shown by Table 3, I get significant beta values in both Regressions 3
and 4 using both the CEO’s equity share and vote share. The linear regression
shows a negative relation between firm value and managerial ownership. As
expected the relation is more negative when the manager’s vote fraction is used,
which is consistent with the idea that the entrenchment effect is better absorbed
in the vote fraction than in the equity fraction, and the incentive effect better
absorbed in the equity fraction than in the vote fraction.
The quadratic regression suggests a U-shaped relation between firm value
and managerial ownership. This is the reversed relation suggested by Stulz
17

19. (1989) and found in McConnell and Servaes (1990). In this paper, I will not
speculate on what gives the relation between firm value and the Swedish CEOs’
ownership a reversed relation to that between firm value and managerial own-
ership in U.S. firms.
Parameters β1 and β2 obtained from the regressions can also tell us the
minima points for the respectively regressions. As seen in Table 3, the minima
are 34.6% when the equity is used and 49.1% when the vote is used. The
difference between the two minima is explained by the manager’s vote fraction
in mean exceeding the equity fraction. The remarkable thing about the minima
points are that they coincide with the means and medians of the CS and CM
ownership found in Table 1. The CS’s mean and median equity fraction is 35.6%
and 33.1% and vote fraction 54.1% and 50.9%. The corresponding mean and
median of the equity and the vote fractions of the CM are 35.5% and 32.8%,
and, 58.9% and 60.6%, respectively. Hence, from this point of view, the typical
ownership structure of Swedish firms is a worst-case-scenario.
[Insert Table 3 here]
Given the results of Regressions 3 and 4, I find it plausible that the results
in Regressions 1 and 2 are in some way affected by the large part of the CSs
that are also CEOs. Therefore, I run Regression 5 which tests Hypothesis 3;
i.e. that the magnitude of Hypotheses 1 and 2 increases if the CS is a CEO.
Table 4 reports that I still obtain a significant negative relation between firm
value and the existence of a CS. A Wald test even confirms that this relation at
a ten-percent significance level is more negative if the CS is also a CEO.23
The
economical significance of having a CM is quite extraordinary — the average CM
makes the firm value drop with 17.8%24
. However, the significance of the equity
fraction owned by the CS is lost unless he is a CEO — then the relation becomes
even more positive. The conclusion is that only the manager has sufficiently
efficient means of affecting the firm in a positive way — the indirect control of
the firm possessed by CSs due to his control of the board is not efficient enough.
Neither do the incentives to monitor the firm increase enough with his equity
share to have a positive effect on firm value. An alternative explanation why
the decrease in firm value of having an CM is more substantial than the increase
from his equity ownership could be that the monitoring of the CEO lessens when
the CS — who usually is the one monitoring the CEO — and the CEO is the same
person.
[Insert table 4 here]
Comments on Regression 5’ in Table 4 will be made in Section 6, Robustness
Tests.
23 The negative relation between entrenched insiders and firm value has earlier been estab-
lished by e.g. Gompers et al. (2003).
24 (−22.3%)+(−7.9%)+(0.1+0.3)·32.8 = −17.8%. Where 32.8 is the CM’s average equity
ownership.
18

20. A notable deduction from the results of Regression 5 is that it takes more
than 88.7 percent equity ownership by the CS for the net effect of his presence
as a CS to have a positive effect on Tobin’s Q. Correspondingly, for the CM
77.4 percent equity ownership is required for a positive net effect.
6 Robustness Tests
It is not obvious what method should be used when considering the relation
between firm value and ownership. Therefore I will present the results of some
alternative models and methods to those presented earlier in this paper as a
robustness test of my paper. I will also try to replicate some of the relevant
regressions of two closely related papers; Claessens et al. (2002) and Cronqvist
and Nilsson (2003). These regressions will be performed using the same control
variables that have been used earlier in this paper. Both Claessens et al. (2002)
and Cronqvist and Nilsson (2003) have looked at large shareholders’ ownership
and the effects of using dual-class shares and they have, to some extent, used
methods similar to mine.
Since there are many regressions in these robustness tests, I have chosen to
only report some of the more interesting results in tables. Whether the results
are reported or not is mentioned in the text.
6.1 Alternative Models
In Section 5 I first found a relation between Tobin’s Q and the existence of CSs
and their equity ownership in Regressions 1 and 2. When I had also established
a relation between Tobin’s Q and CEO ownership in Regressions 3 and 4, I found
in Regression 5 that a large part of the relation between Tobin’s Q and having
a CS stems from the large part of CSs that also are CEOs. An additional
way of confirming this conclusion is to see what happens when all CEOs are
excluded from the CS group when running Regressions 1 and 2.25
In that way,
all eventual influence from the CMs on Tobin’s Q is excluded from the relation
between Tobin’s Q and the existence of CSs and their equity fraction. These
regressions are called 1’ and 2’ and their outcomes are presented in Table 2. As
reported in the table, the significance of the CS dummy and his equity fraction
is lost in Regressions 1’ and 2’, which strengthens the conclusion that there is
no relation between firm value and CSs, unless the CS also serves as the CEO.
In Regression 5, I looked at the difference between CSs and CMs where,
per definition, CMs are individuals, whereas CSs cannot only be individuals
or families, but also foundations, institutions, other corporations and so on.
Therefore, the question is whether it is not more relevant to look at the dif-
ference between CMs and other individuals being CSs. Hence, I exclude the
non-individuals from the CS sample and rerun Regression 5. This regression is
called Regression 5’ and the result is presented in Table 4. The regression shows
25 The sample size remains the same, 1754, since the CEOs are only excluded from the group
of CSs, i.e. they are not excluded from the sample.
19

21. no significant relation between firm value and CSs when non-individuals are ex-
cluded. That is, Tobin’s Q does not have any relation to an individual being
in control per se. The relation between firm value and having a CM remains,
however, and even grows as compared to Regression 5. Hence, I conclude that
both the entrenchment effect and the incentive effect of having a CS are not at
all effects of having a CS as such, but that the relation stems from a managerial
effect.
6.2 OLS
I have argued that fixed firm effects constitute a better method than OLS when
testing Regressions 1-5. However, I have chosen to run the regressions using OLS
with robust standard errors on all 1754 firm-year observations as a robustness
test. These results are not reported in any table, however. Using OLS with
robust standard errors, the ownership variables in Regressions 2, 4 and 5 become
insignificant. Otherwise the results correspond to those using the fixed effect
method. These results are the same whether year dummies are included or not.
A significant fixed effect result but an insignificant OLS result suggests there
to be unobserved heterogeneities, captured by the fixed firm effects, explaining
why CSs and CMs exist more often in firms with a low rather than a high
Tobin’s Q. Not surprisingly, some of the significance in Regressions 2, 4 and 5
is re-established if industrial dummies are included in the regressions.
6.3 Q, not ln(Q)
In my paper, I have chosen to use the natural logarithm of Tobin’s Q due to the
skewness. To test the solidity of my results, I have also chosen to test Regressions
1-5 using an "unlogged" Tobin’s Q. The results then basically become the same,
except the loss of significance in Regression 1, in Regression 3 when equity is
used and also the CEOs equity fraction in Regression 5 becomes insignificant.
These results are not reported in any table. One explanation to the insignificant
results could be that outliers in the data give more extreme values when Tobin’s
Q is not logged
6.4 ROA
Even though Tobin’s Q is probably the most commonly used measure of firm
value, it is not the only one. Another popular measurement is return on assets
(ROA). The major difference between the two is that whereas Tobin’s Q is
forward looking, ROA is backward looking. To test the solidity of the results of
Regressions 1-5, I have chosen to run the regressions using ROA as the dependent
variable.26
These regressions are not presented in any table. Even though the
signs are the same, all significance in the regressions is lost, except Regression 2
and the continuous equity ownership variables in Regression 5 where the results
26 When ROA is calculated the observations drop from 1754 to 1458 due to lack of informa-
tion in the data.
20

22. remain the same as before. Even though these results are somewhat unfortunate
for the robustness of my results, it is also interesting that they are significant
for a forward looking measurement such as Tobin’s Q but not for a backward
looking measurement such as ROA. However, it is not for this paper to explain
why, but a task for future research.
6.5 Claessens et al. (2002)
In their paper Claessens et al. disentangled the incentive effect from the en-
trenchment effect using a regression looking roughly like:
Q = β1 + β2(Ownership)i + β3(Control − Ownership)i
+β4−7(Control variables)i + εi (6)
where (Ownership)i is the cash-flow rights held by the largest shareholder
and (Control − Ownership)i is the difference between control rights and cash-
flow rights held by the largest shareholder. I test this regression using both
OLS regressions with robust standard errors on the 1996 data like they did, and
thereafter with fixed firm effects during the period 1986-2001. Unlike Claessens
et al. (2002), none of the regressions give any significant results. Since none
of the results are significant, I have chosen not to report them in a table. One
plausible reason for the insignificant results using OLS, could be the lack of
observations (only 128 observations). Another possible explanation for the in-
significant results could be that I have more extensive data which allows me
to include more relevant control variables, i.e. the results from Claessens et al.
(2002), to some extent, might be explained by firm characteristics, not included
in their regressions, but in mine.
6.6 Cronqvist and Nilsson (2003)
Cronqvist and Nilsson (2003) looked at the relation between firm value and CSs
by using the natural logarithm of Tobin’s Q as dependent variable and the con-
trolling owner’s27
vote ownership and the controlling owner’s excess votes28
as
explanatory variables. They examine this relation using three different regres-
sions. First, they consider an OLS regression:
Qit = β0 + β1(V oteownership) + β2([V ote/Equity] − 1)it + εit (7)
εit is the error term. This regression is then tested adding year dummies
and some control variables:
27 They use the same definition of controlling owner that has been used in this paper.
28 Excess votes are calculated as ((Controlling owners vote ownership)/(Controlling owners
equity ownership)-1.
21

23. Qit = β0 + β1(V oteownership) + β2([V ote/Equity] − 1)it
+β3Controlsit + β4Y eardummiest + εit (8)
As a third regression they add fixed firm effects. Then the regression looks
like this:
Qit = β1(V oteownership) + β2([V ote/Equity] − 1)it
+β3Controlsit + β4Y eardummiest + ui + vit (9)
where ui is the unobservable firm-specific effect and vit is the ordinary error
term. Regressions 7, 8 and 9 correspond to Cronqvist’s and Nilsson’s Regres-
sions (1), (2) and (3) in their Table 4. In their paper they found a negative
relation between firm value and the controlling owners’ vote ownership in all
these regressions. However, they found no significant relation between firm
value and controlling owner’s excess votes. Cronqvist and Nilsson (2003) use
similar control variables as those I use, with one exception; they also use return
on asset (ROA) as a control variable. I believe this variable might have a major
influence on the results since it is so closely related to the explanatory variable,
Tobin’s Q. Therefore, I have chosen to run the regressions both excluding (in
Regressions 8a and 9a) and including (in Regressions 8b and 9b) this variable.
As mentioned above, the observations drop from 1754 to 1458 when ROA is
calculated, due to lack of information in the data. The results are presented in
Table 5.
[Insert Table 5 about here]
My replication shows similar results to those in Cronqvist and Nilsson (2003).
The only differences are a positive significant exvote coefficient in Regression 7,
and insignificant controlling owner vote ownership in Regressions 8b and 9a.
The most interesting result though is what happens when the sample is
changed by dropping the observations with dispersed ownership, i.e. I only in-
clude the observations with CSs. This is a reasonable benchmark considering
that one of the independent variables is the CSs vote ownership. For example,
Claessens et al. (2002) also chose to use a cut-off point and excluded all obser-
vations where the largest shareholder had less than ten percent of the control
rights. The number of firm-year observations then drops to 1412 when ROA
not is included and 1216 when ROA is included. The results of Regression 7-9,
when excluding all observations with dispersed ownership from the sample, are
presented below in Table 6.
[Insert Table 6 about here]
As can be seen, all the significant results are lost in Regression 7 as com-
pared to when all firms were included in the sample. The most interesting
22

24. result, though, is that the CS vote ownership coefficient, β1, changes signs from
negative to positive in Regressions 8 and 9, even though it is only in Regression
9a that it is significant. My conclusion is that the negative relation found in
Cronqvist and Nilsson (2003) probably captures the effect of having a CS per se
rather than the CS’s ownership level in the firm. This result is consistent with
the idea of there being a negative relation between firm value and the existence
of a CS, but that the CS’s ownership in the firm is positively related to firm
value.
7 Summary and Conclusion
In this paper I study the relation between controlling shareholders and the value
of the firm. Just like Claessens et al. (2002) I disentangle the entrenchment
effect and the incentive effect of controlling shareholders. But in this paper I
also disentangle the managerial effects from the effects of having a controlling
shareholder.
The major conclusion of this study is that expropriation of minority share-
holders occurs in such degree that the disadvantages for a firm to have a con-
trolling shareholder by far exceed its benefits. Primarily this depends on the
separation between equity and control through extensive use of dual-class shares.
Dual-class shares makes it possible to gain control of a firm without getting the
right economical incentives, which leads to expropriation of the firm at the cost
of the smaller shareholders. Furthermore, the expropriation seem to be even
larger when the controlling shareholder also act as CEO of the firm.
Dual-class shares are used extensively among Swedish firms which in turn has
contributed to that the vast majority of the Swedish firms are dominated by a
single controlling shareholder. This corporate ownership structure has also been
encouraged by Swedish government, in fact, individuals and families who own
more than 25 percent of the control rights in a firm even get tax advantages in
Sweden. However, the results of this study — among others — should indicate that
the Swedish corporate governance policy ought to be revised. The circumstance
that non of the top 50 largest firms in year 2000 were founded after 1970 is
an additional indication of an unhealthy corporate climate in Sweden [Högfeldt
2004].
The main idea with dual-class shares is to give entrepreneurs the opportunity
to get funding without for that matter loosing control of their firm. The major
drawback with this system is that when the firm no longer is controlled by the
young enthusiastic founder — but rather an heir, another firm, institution etc. —
dual-class shares instead seem to destroy firm value. Hence a good alternative
system to the one used today could be... [Morck forthcoming 2006].
23

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26

28. Table 1: Descriptive Statistics
CS No CS Diff.
Mean Median Mean Median t-test Wilcoxon
Q 1.45 1.13 1.97 1.29 (0.000) (0.000)
CS equity 35.6% 33.1% - -
CS vote 54.1% 50.9% - -
CS v/e 1.52 1.54 - -
CM equity 35.5% 32.8% - -
CM vote 58.9% 60.6% - -
CM v/e 1.66 1.85 - -
CEO equity 9.2% 0% 2.1% 0% (0.000) (0.000)
CEO vote 14.9% 0% 3.8% 0% (0.000) (0.003)
CEO v/e 1.62 - 1.81 - (0.000) (0.000)
ln(Size) 7.48 7.30 7.48 7.23 (0.958) (0.550)
Leverage 0.66 0.31 0.57 0.60 (0.000) (0.000)
Sales/Total assets 1.01 1.07 1.16 1.18 (0.000) (0.000)
PPE/Total assets 0.47 0.45 0.43 0.40 (0.001) (0.000)
Inv./Total assets 0.11 0.09 0.11 0.08 (0.258) (0.144)
ln(Age) 3.60 3.87 3.37 3.51 (0.000) (0.000)
n 1405 349
This table reports descriptive statistics of the 203 Swedish firms over the years
1985-2000, used in the regressions of this paper. The sample is divided into
two sub-samples; one where there is a CS in the observed firm and one where
there is not. In the last two columns, a t-test and a Wilcoxon test are made to
see whether the mean or the median differs between the two samples. An
approximation of Tobin’s Q is reported followed by both the equity fraction and
the vote fraction owned by the CS, CM and of the CEO in the observed firm.
Moreover, the v/e ratios ( the ratios between the vote share and the equity
share) are included to give an insight in to what degree the CS, CM and CEO
uses dual-class shares. Finally, the statistics of the control variables
are reported. The numbers in parentheses are the p-values of the t-test
and the Wilcoxon-test.
27

29. Table 2: Fixed effect regressions on the relation between Tobin’s Q and CSs
and their equity ownership
Dependent variable: ln(Tobin’s Q)
Regression: 1 2 1’ (No CEOs) 2’ (No CEOs)
Constant 0.966 0.970 0.901 0.903
(0.000) (0.000) (0.000) (0.000)
entrenchmentcs
it -0.070 -0.124 0.014 -0.013
(0.008) (0.001) (0.518) (0.721)
incentivecs
it - 0.002 - 0.001
(0.036) (0.352)
ln(Firm size) -0.012 -0.011 -0.008 -0.008
(0.530) (0.563) (0.664) (0.682)
Leverage -0.522 -0.536 -0.531 0.537
(0.000) (0.000) (0.000) (0.000)
Sales/Total assets 0.027 0.026 0.030 0.029
(0.366) (0.379) (0.313) (0.330)
PPE/Total assets -0.179 -0.170 -0.173 -0.170
(0.007) (0.010) (0.009) (0.010)
Inv./Total assets 0.250 0.248 0.254 0.251
(0.001) (0.001) (0.001) (0.001)
ln(Age) -0.068 -0.072 -0.075 -0.076
(0.056) (0.043) (0.034) (0.032)
Year dummies yes yes yes yes
N 203 203 203 203
n 1754 1754 1754 1754
Hausman-test 51.69 63.63 76.80 64.13
(0.000) (0.000) (0.000) (0.000)
F-test 17.31 16.80 16.96 16.26
(0.000) (0.000) (0.000) (0.000)
R2
0.230 0.218 0.220 0.217
Table 2 reports the estimated relation between the existence of a CS and the CS’s
ownership on the natural logarithm of Tobin’s Q. entrenchmentcs
it is a dummy that
equals one if there exists a CS and zero otherwise. incentivecs
it is the CS’s equity
fraction in the firm. In Regressions 1’ and 2’ however, the CEOs are excluded from the
CS group; i.e. when a CS also is a CEO, the dummy equals zero. After
entrenchmentcs
it and incentivecs
it the results of the control variables are
reported. Year dummies for the years 1986-2000 are used in the regressions.
N is the number of firms, whereas n is the number of total observations of the 203
firms over the years 1985-2000. The Hausman-test is madeunder the null-hypothesis
of no correlation between regressors and firm-specific effects. The F-test is made to
test whether the fixed firm effects are jointly significant.
p-values are reported in parentheses.
28

30. Table 3: Fixed effect regressions on the relation between Tobin’s Q and man-
agerial equity and vote ownership
Dependent variable: ln(Tobin’s Q)
Regression: 3 4
equity vote equity vote
constant 0.923 0.947 1.028 0.970
(0.000) (0.000) (0.000) (0.000)
ownership -0.0015 -0.0020 -0.010 -0.008
(0.036) (0.000) (0.000) (0.000)
(ownership)2
- - 0.00015 0.00008
(0.000) (0.001)
ln(Firm size) -0.010 -0.014 -0.018 -0.012
(0.585) (0.464) (0.351) (0.517)
Leverage -0.528 -0.527 -0.540 -0.533
(0.000) (0.000) (0.000) (0.000)
Sales/Total assets 0.030 0.030 0.029 0.034
(0.317) (0.314) (0.323) (0.254)
PPE/Total assets -0.167 -0.157 -0.155 -0.158
(0.012) (0.017) (0.019) (0.016)
Inv./Total assets 0.250 0.253 0.240 0.258
(0.001) (0.001) (0.002) (0.001)
ln(Age) -0.071 -0.068 -0.084 -0.076
(0.045) (0.054) (0.018) (0.032)
Year dummies yes yes yes yes
R2
0.227 0.224 0.209 0.216
N 203 203 203 203
n 1754 1754 1754 1754
Hausman-test 75.51 74.35 52.76 66.40
(0.000) (0.000) (0.000) (0.000)
F-test 17.19 17.74 17.30 17.52
(0.000) (0.000) (0.000) (0.000)
Minimum point - - 34.6% 49.1%
Table 3 reports the estimated relation between CEO ownership and the natural
logarithm of Tobin’s Q. The first column reports the result of Regression 3, using the
CEO’s equity fraction to describe managerial ownership. The second column reports
the results of the same regression, but where the vote fraction has been used. Columns
three and four report the results of Regression 4, first using the equity fraction and
then the vote fraction as a measure of ownership. After the ownership variables, the
results of the control variables are reported. Year dummies for the years 1986-2000
are used in the regressions. N is thenumber of firms, whereas n is the number of
total observations of the 203 firms over the years 1985-2000. The Hausman-test is
made under the null-hypothesis of no correlation between regressors and firm-specific
effects. The F-test is made to test if the fixed firm effects are jointly significant. Finally
the minimum point of the non-linear regression is reported.
p-values are reported in parentheses.
29

31. Table 4: Fixed effect regressions on the relation between Tobin’s Q and CSs’
and CMs’ ownership
Dependent variable: ln(Tobin’s Q)
Regression: 5 5’ (Excluding non-family)
Constant 1.016 0.990
(0.000) (0.000)
entrenchmentcs
it -0.079 -0.026
(0.042) (0.537)
entrenchmentcm
it -0.223 -0.246
(0.000) (0.000)
incentivecs
it 0.001 0.0002
(0.287) (0.801)
incentivecm
it 0.003 0.003
(0.053) (0.029)
ln(Firm size) -0.017 -0.017
(0.368) (0.374)
Leverage -0.536 -0.535
(0.000) (0.000)
Sales/Total assets 0.026 0.027
(0.377) (0.355)
PPE/Total assets -0.161 -0.162
(0.014) (0.014)
Inv./Total assets 0.253 0.257
(0.001) (0.001)
ln(Age) -0.073 -0.073
(0.040) (0.038)
N 203 203
n 1754 1754
Hausman-test 58.99 65.30
(0.000) (0.000)
F-test 16.33 16.12
(0.000) (0.000)
R2
0.217 0.217
Table 4 reports estimated effects of the existence of a CS and CM and of his
ownership on the natural logarithm of Tobin’s Q. entrenchmentcs
it and
entrenchmentcm
it are dummiesthat equal one if there exists a CS/CM and
zero otherwise. incentivecs
it and incentivecs
it are their equity fraction in the firm.
After the dummies and the equity ownership variables, the results of the control
variables are reported. Year dummies for 1986-2000 are used in the regressions.
N is the number of firms, whereas n is the number of total observations of the 203
firms over the years 1985-2000. In Regression 5’, all non-individuals have been
excluded from the CS group so that it can be better compared to the CM group which,
per definition, only consists of individuals. The Hausman tests are made under the
null-hypothesis of no correlation between regressors and firm-specific effects. F-tests
are made to test whether the fixed firm effects are jointly significant.
p-values are reported in parentheses.
30

32. Table 5: Replication of Cronqvist and Nilsson (2003), Table 4, Regression 1-3
Dependent variable: ln(Tobin’s Q)
Regression: 7 8a 8b 9a 9b
CS vote ownership -0.0027 -0.0008 -0.0005 -1.97e-5 -0.0009
(0.000) (0.047) (0.256) (0.966) (0.033)
CS excess votes 0.0134 0.0096 0.0106 0.0009 0.0082
(0.063) (0.146) (0.083) (0.902) (0.201)
Control variables No Yes Yes yes Yes
ROA No No Yes No Yes
Year dummies No Yes Yes Yes Yes
Fixed firm effects No No No Yes Yes
N 203 166
n 1754 1754 1458 1754 1458
Table 5 reports results from replications of regressions tested in Cronqvist and
Nilsson (2003). The dependent variable is Tobin’s Q. Independent variables are
the controlling shareholders’ fraction of control rights and a ratio between his
control rights and cash-flow rights. The first column, Regression 7, shows the
results of an OLS regression with robust standard errors. In Regressions 8a and
8b, the same regression is tested but adding control variables and year dummies.
Regressions 9a and 9b are similar to Regressions 8a and 8b but using fixed firm
effects. In Regression 8b and 9b ROA is added as a control variable. N is the
number of firms, whereas n is the number of total observations.
p-values are reported in parentheses.
31

33. Table 6: Replication of Cronqvist and Nilsson (2003), Table 4, Regression 1-3.
Firms with dispersed ownership excluded from sample.
Dependent variable: ln(Tobin’s Q)
Regression: 7 8a 8b 9a 9b
CS vote ownership -0.005 0.0004 0.0007 0.003 0.001
(0.402) (0.501) (0.222) (0.000) (0.233)
CS excess votes 0.006 0.003 0.003 0.003 0.005
(0.341) (0.622) (0.581) (0.655) (0.462)
Control variables No Yes Yes yes Yes
ROA No No Yes No Yes
Year dummies No Yes Yes Yes Yes
Fixed firm effects No No No Yes Yes
N 182 154
n 1412 1412 1216 1412 1216
Table 6 reports results from replications of regressions tested in Cronqvist and
Nilsson (2003). The difference from Table 5 is that all firms with dispersed
ownership have been excluded from the sample. The dependent variable is
Tobin’s Q. Independent variables are the controlling shareholders’ fraction of
control rights and a ratio between his control rights and cash-flow rights.
The first column, Regression 7, shows the results of an OLS regression
with robust standard errors. In Regressions 8a and 8b, the same
regression is tested but adding control variables and year dummies.
Regressions 9a and 9b are similar to Regressions 8a and 8b, but using
fixed firm effects. In Regression 8b and 9b ROA is added as control variable.
N is the number of firms, whereas n is the number of total observations.
p-values are reported in parentheses.
32