Governance with poor investor protection: evidence from top executive turnover in Italy

Abstract

This paper analyzes executive turnover and firm valuation in Italy, a country that features all the characteristics of the most common governance structure around the world, as described by La Porta, et al. (1999): low legal protection for investors, firms with large controlling shareholders and pyramidal groups. The main findings are that turnover is significantly lower and unaffected by performance when the controlling shareholder of the firm is also a top executive in the firm, while it is more sensitive to performance when control is, to some extent, contestable and when the controlling shareholder owns a larger fraction of the firm's cash-flow rights. The results on valuation are the mirror image of those on turnover: the firm's Q is lower for companies with the controlling shareholder as a top executive, larger when a voting syndicate controls the firm, and increases with the fraction of cash-flow rights owned by the controlling shareholder.

Ownership, performance and executive turnover in China

“…However, the increased ownership stake of the controlling shareholder strengthens the link, which is evidence of greater monitoring benefit from ownership concentration (Volpin, 2002). Using Chinese data, studies generally find that state ownership, especially direct government ownership, is associated with weaker disciplining of managers, which confirms the prediction of the agency theory (Groves et al, 1995;Aivazian et al, 2005;Firth et al, 2006).…”

“…Others find that ownership types and concentration do matter. Denis et al (1997) and Volpin (2002) show that managerial ownership and control weaken the turnover-performance link, supporting the entrenchment effect.…”

Ownership structure and minority expropriation: the case for multiple blockholders

“…This article is related to others that look at the effect of multiple blockholders on firm market values (Volpin, 2002;Laeven and Levine, 2008), dividend policy (Faccio et al, 2001) and corporate governance (Korczak and Korczak, 2009). On the issue of contestability, Lehmann and Weigand (2000) show that the presence of a second large shareholder improves the profitability of German listed firms and Maury and Pajuste (2005) find that firm value increases using a sample of Finnish listed firms.…”

Examining the Relationship between Disproportional Ownership Mechanisms and Company Performance: An Empirical Research

“…Indeed, despite large shareholders owning substantial cash-flow rights improve managerial monitoring and limit the classic agency costs (Shleifer & Vishny, 1997), their presence fosters the extraction of private control benefits (Bebchuk, Kraakman, & Triantis, 2000;Gianfrate, 2007). This circumstance is especially widespread in most Asian markets and European countries where the phenomenon is mainly due to the presence of pyramidal structures, cross shareholdings, multiple voting shares, non-voting shares, priority shares, golden shares, voting-right ceilings, ownership ceilings, depositary certificates, voting trusts, partnerships limited by shares, and loyalty shares (Bianco & Casavola, 1999;Zattoni, 1999;Volpin, 2002;Ferrarini, 2006;Institutional Shareholder Services, 2007). Indeed, these ownership tools produce a wedge between controlling and minority shareholders and a full violation of the OSOV rule since they directly or indirectly assign the former with more control than cash-flow rights (Burkart & Lee, 2008;Zattoni, 1999;Gianfrate, 2007;Saggese, 2013).…”

“…Indeed, Italy is a country characterized by large private benefits of control (Zingales, 1994;La Porta et al, 1999;Faccio & Lang, 2002). Moreover, Italian listed companies present a strong ownership concentration and marked misalignment between cash-flow rights and voting rights due to the notable adoption of disproportional ownership mechanisms by listed companies (Brioschi, Buzzacchi, & Colombo, 1990;Bianco & Casavola, 1999;Johnson, La Porta, Lopez-de-Silanes, & Shleifer, 2000;Faccio & Lang, 2002;Volpin, 2002;Hauser & Lauterbach, 2004). Finally, Italy has been also characterized by a wave of reforms aiming to improve the protection of both financial markets and investors, and to limit the incentives to the distorted use of DOMs (Mengoli, Pazzaglia, & Sapienza, 2009;Saggese, 2013;Linciano, Ciavarella, & Signoretti, 2014).…”