Active Ownership – a Study of Swedish Investment Companies
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Active ownership – a study of Swedish investment companies Gustaf Petersson1 and Patrik Jedefors2 Master Thesis in Accounting and Financial Management Stockholm School of Economics Abstract In this thesis on value creation of active owners, publicly traded Swedish investment companies are examined. Their ability to add value to their portfolio companies is tested against a matched sample of peer companies. According to the principal agent theory, investment companies have incentives to control or align top management in companies they own. Previous research on ownership related to firm performance has shown a complex relationship where both ownership concentration and ownership identity, as well as interactions of these effects, affect observed performance. These findings form the basis of four hypotheses on value creation tested in the thesis using data on 45 portfolio companies and their peers. No significant difference in performance is found between the companies. However, there is weak evidence that large ownership by one or two investment companies decreases performance of the portfolio company. Keywords: Investment company, closed-end fund, active ownership, matched sample Tutor: Assistant Professor Håkan Thorsell Date: 2012-05-14 Acknowledgements: The authors would like thank our tutor Håkan Thorsell for his encouragement and support during the process of writing this thesis, Tomas Hjelström for kindly sharing his knowledge on the subject, Per- Olov Edlund and Rickard Sandberg for valuable discussions about the statistical method. 1 [email protected] 2 [email protected] Table of Contents List of figures and tables ................................................................................................................. ii 1 Introduction ............................................................................................................................... 1 1.1 Demarcation ....................................................................................................................... 2 1.2 Investment companies in Sweden ...................................................................................... 2 1.3 Outline of the thesis ........................................................................................................... 3 2 Previous research ...................................................................................................................... 4 2.1 Value creation towards investors ....................................................................................... 4 2.2 Value creation in portfolio companies ............................................................................... 5 3 Hypotheses .............................................................................................................................. 10 4 Research design ...................................................................................................................... 11 4.1 Matching .......................................................................................................................... 11 4.2 Models ............................................................................................................................. 13 5 Data ......................................................................................................................................... 15 5.1 Dataset ............................................................................................................................. 15 5.2 Choice of portfolio companies ........................................................................................ 17 5.3 Choice of peer companies ................................................................................................ 19 5.4 Estimating variables ........................................................................................................ 21 6 Results ..................................................................................................................................... 25 6.1 Descriptive statistics ........................................................................................................ 25 6.2 Tests of hypotheses .......................................................................................................... 26 7 Analysis ................................................................................................................................... 30 8 Conclusion .............................................................................................................................. 31 9 References ............................................................................................................................... 33 Appendix 1: Additional regressions ............................................................................................... 36 Appendix 2: Tests for normality .................................................................................................... 37 Normality test for hypothesis 2 .................................................................................................. 37 Normality test of residuals for linear regressions ....................................................................... 37 Appendix 3: Table of literature ...................................................................................................... 38 Appendix 4: Dataset ....................................................................................................................... 39 Investment companies ................................................................................................................ 39 Portfolio companies .................................................................................................................... 40 Peer groups ................................................................................................................................. 41 i List of figures and tables Figure 1: The value creation processes in investment companies.................................................... 4 Figure 2: Framework for ownership as a form of corporate governance ......................................... 7 Figure 3: The investment company as an active owner ................................................................. 10 Table 1: Variables used in regressions ........................................................................................... 15 Table 2: Structure of the dataset. .................................................................................................... 16 Table 3: List of excluded portfolio companies ............................................................................... 18 Table 4: Variables used in the dataset ............................................................................................ 22 Table 5: Descriptive statistics of data. ........................................................................................... 25 Table 6: Table with top and bottom five portfolio companies and their investment company ...... 25 Table 7: Z-test and Wilcoxon test for difference in RONA and operating margin. ....................... 26 Table 8: T-test and Wilcoxon test for difference in RONA and operating margin. ....................... 27 Table 9: Z-test and Wilcoxon signed rank test on portfolio companies owned since 2002 ........... 28 Table 10: Regression results of the difference in operating performance, specification 1 ............ 28 Table 11: Regression results of the difference in operating performance, specification 2 ............ 30 Table 12: T-test and Wilcoxon test; investment companies as long-term and large owners ......... 36 Table 13: Shapiro-Wilks test for normality .................................................................................... 36 Table 14: Z-test and Wilcoxon sign rank test for the period 2005-2007 ....................................... 36 Table 15: Shapiro-Wilks test for normality .................................................................................... 37 Table 16: Normaity test of residuals .............................................................................................. 37 Table 17: Swedish investment companies on NasdaqOMX in 2010 ............................................. 39 Table 18: List of portfolio companies and ownership information ................................................ 41 ii 1 Introduction “We want to create shareholder value by developing the companies we already own – not by selling” – Jacob Wallenberg, chairman of Investor AB3 Swedish investment companies are unique in the sense that most of them are publicly traded holding companies with the explicit purpose of actively developing publicly traded companies. Once created to save commercial banks from high risk shares, some of the Swedish investment companies have been around for about 80 years. Impressive as it may seem, this is not without controversy. Business journalists, as well as investors, question their ability to create value on a public marketplace (Cervenka, 2011). Publically traded investment companies often trade with a market capitalization substantially lower than their net asset value4. This discount is used by business journalists as an index of the public esteem of top management performance, since poor management performance is assumed to lower the investor’s valuation of the investment company’s portfolio and the way it is managed. In combination