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- 1. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez June 28, 2015
- 2. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Agenda 1 Introduction 2 Theoretical Model 3 Methodology Network Analysis Inferential Analysis 4 Data 5 Descriptive analysis 6 Empirical Results Robustness check 7 Conclusions
- 3. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Introduction Our paper assesses the impact of cross ownership on ﬁrm performance and industry competition through an analysis of shareholder’s networks in Spain We focus on three speciﬁc sectors: Food, Pharmaceutical and Energy, for which we show the evolution of cross ownership concentration from 2004 to 2012 Firm-level mark-ups as a measure of industry competition Market share as a measure of ﬁrm performance The chief hypothesis we present is that more connected ﬁrms coordinate their market strategies to compete less aggressively and perform better than their less connected rivals
- 4. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Introduction Related literature Our study relates to several papers, we will mention the most important ones: Bhattacharya and Graham (2009): They study the eﬀect of institutional cross ownership and ﬁrm performance, measured by Tobin’s Q, in Finland. Concluding that ownership concentration does not aﬀect ﬁrm performance He and Huang (2014): They asses how institutional cross-ownership of same industry ﬁrms aﬀects product market behaviour in they U.S. They results show that cross-held ﬁrms experience a signiﬁcantly higher market share growth than non-cross held ﬁrms Azar, Schnalz and Tecu (2015): They examine institutional ownership on the U.S. airline industry, ﬁnding that product prices are 3-11% higher because of common ownership
- 5. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Theoretical Model Azar, Schmalz and Tecu (2015) shows the mechanism through which cross ownership aﬀects the proﬁt maximization function of companies Deﬁne: M: number of investors in the industry N: number of companies in the industry j: a given company in the industry βik : share of equity of investor i on ﬁrm k πi : proﬁts of investor i πj : proﬁts of company j xj : strategy of company j
- 6. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Theoretical Model Investor i total proﬁts from its portfolio of companies are: πi = k βikπk (1) As ﬁrms aim to maximize shareholders’ value, then ﬁrm j maximization function is: max xj ˆπj = M i=1 βij N k=1 βikπk (2) This can also be expressed in the following way: max xj ˆπj = πj + k=j i βik i βij πk (3)
- 7. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Theoretical Model Therefore, companies maximize their own proﬁt plus a linear combination of the proﬁts of other companies where its shareholders have equity stakes. The expression i βik i βij represents the weight each company puts in the proﬁts of the rest of the ﬁrms in the industry, and thus, is a measure of the degree of connectivity between companies as a result of their cross ownership.
- 8. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Methodology Network Analysis We deﬁne two companies to be connected in the cross ownership network if they have at least one investor with a stake of equity above 1% Adjacency matrix: For every pair of ﬁrms, a value of ”1” represents a cross ownership connection, whereas a value of ”0” represents no connection Network Density: Measures the degree of connectivity among industry ﬁrms through cross ownership. Calculated as: Density = k i=1 j=i yij k(k−1) 2 (4) Connections generated by the largest shareholders: We also calculated the percentage of connections generated by the major shareholders at each point in time, as a measure of ownership concentration
- 9. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Methodology Inferential Analysis We want to evaluate the eﬀect of cross ownership on industry competition and ﬁrm performance Measure of industry competition: Markupi,t = OperatingRevenuesi,t OpertatingExpensesi,t (5) Measure of ﬁrm performance: MarketSharei, t = Salesi,t k i=1 Salesi,t (6)
- 10. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Methodology Inferential Analysis OLS regressions 1 Eﬀect of cross ownership on markup: Markupi,t = α+βNconnectionsi,t+γXi,t+δZi, t+Firmi + i,t (7) 2 Eﬀect of cross ownership on market share: MarketSharei,t = α+βNconnectionsi,t+γXi,t+δZi, t+Firmi + i,t (8) Where: N connections: Main variable of interest. Measures the number of edges each company has with other industry ﬁrms in the cross ownership network, normalized by the total number of companies in each period of time X: Vector of industry time-varying characteristics, including Average Industry Markup and Network Density Z: Vector of ﬁrm-speciﬁc control variables, which include Leverage, Size, and Sales Growth Firm: It captures ﬁrm ﬁxed eﬀects.
- 11. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Data Two datasets: 1 Accounting data from Spanish listed companies: Obtained from Compustat Global Removed companies from the Financial Services Industry and SICAVs 2 Ownership data: Obtained from Thomson Reuters institutional holdings After merging both samples, we end up with 250,977 observations for our network analysis, and 809 ﬁrm-quarterly observations for the regressions. We focus on companies belonging to the Food (SIC 20), Pharmaceutical (SIC 28), and Energy (SIC 49) industries.
- 12. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Descriptive analysis Major shareholders
- 13. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Descriptive analysis Major shareholders
- 14. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Descriptive analysis Density
- 15. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Descriptive analysis Percentage of connections Figure: Percentage of connections generated by the largest shareholders at 1% threshold
- 16. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Descriptive analysis Network: Energy sector
- 17. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Empirical Results Azar (2012) found a positive and signiﬁcant eﬀect of Industry Network Density on Average Industry Markups He and Huang (2014) found a positive and signiﬁcant eﬀect of diﬀerent measures of Cross Ownership on Market Share Growth
- 18. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Empirical Results Robustness check
- 19. Cross ownership and ﬁrm performance Octavi Castells, Jaime Lopez, Berenice Ramirez Introduction Theoretical Model Methodology Network Analysis Inferential Analysis Data Descriptive analysis Empirical Results Robustness check Conclusions Conclusions Moderate increase of Cross Ownership Network Density from 2004 to 2012. Importance of largest shareholders on Network Density varies a lot over time, as compared with the U.S. (Azar, 2012) Companies that share investors with high stakes in their equity have higher markups, providing evidence of collusive behaviour among natural competitors Further research should be conducted (specially in European countries) in order to provide regulators with a better perspective about the implications that increasing cross ownership can have in market competition and, in the end, in ﬁnal consumers.

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