Essays on Voting Power, Corporate Governance and Capital Structure

Abstract

This dissertation is divided into 4 essays. Each focuses on different aspect of firm risk and corporate governance issues. It mainly deals with corporate governance issues in the context of strong owner control and its implications to market efficiency. The interrelationship between corporate governance, takeovers, firm performance, capital structure and voting structure is explored.

The first paper integrates existing knowledge in owner control and corporate governance using Swedish data. First it provides different measurements of voting power, and then links the voting power with private benefits of control in an analysis of control rent. The implication of dual class of shares in a takeover contest is explored. As an application, the power structures of a group of Swedish listed firms are examined using the Shapely-Shubik power index and the Banzhaf power index.

The second paper employs agency theory and findings in corporate governance to study a group of listed firms with dual class of shares and pyramidal structure in Sweden. 44 listed firms with both A and B shares traded on SSE are studied using market data and accounting statements. Determinants of voting concentration are analyzed both by using a single equation Tobit model and by a simultaneous equations model where power of the controlling owner, and firm performance are treated as endogenous. The single equation Tobit model indicates that growth rate in terms of increase in total assets is negatively related to the voting concentration. Also, firms with better performance in terms of (accounting) return on assets tend to have a more concentrated voting structure. However, performance in terms of market-to-book ratio is negatively and significantly correlated to voting concentration when voting power of the controlling owner is evaluated at simple majority but not when evaluated at the super majority.

The third paper studies the effects of a voting scheme change on the stock market prices of both Electrolux and SKF AB using standard event study methodology and a clinical approach. The economic effect of the voting scheme change is assessed using the market model. We investigate the loss of control due to the change in the voting scheme. The degree of change in power is calculated using the Shapley-Shubik power index and the Banzhaf power index. There is a wealth transfer from the high vote shareholders to the low vote shareholders in the process.

The last paper analyzes factors influencing firm leverage. We use market capital ratio, book capital ratio and book debt ratio as measures of leverage and an unbalanced panel data of seven countries: Canada, Denmark, Germany, Italy, Sweden, the UK, and the US. We find that firm size, profitability, tangibility, and market-to-book ratio have significant impact on the capital structure choices of firms. Tangibility is positively related to leverage, while profitability shows a negative significant relation to leverage across all seven countries. The impact of the market-to-book ratio varies in the book debt ratio model but shows a negative and significant relation in the market leverage model for all countries except Denmark, which shows an insignificant parameter value. Evidence from the seven countries is consistent with the findings in capital structure theories, i.e. more profitable firms borrow less. Smaller firms borrow less, etc.