Large Shareholders and Corporate Control大股东和公司控制

来源：Yonca Ertimur, Ewa Sletten, Jayanthi Sunder. Large shareholders and disclosure strategies: Evidence from IPO lockup expirations. J. Journal of Accounting and Economics 58(2014):79-95大股东和披露策略--来自上市锁定期的证据一、写作目的：之前的一些研究发现管理层通过策略性的披露来使自己受益，但作者认为管理层自身利益不是策略性披露的唯一动机，一些大股东比如风险投资者、对冲基金投资者等对管理层能够施加重大影响，所以说，作者认为大股东是否能够对策略性披露施加重大影响是个值得探讨的话题，同时，作者通过调查研究发现当投资者有较强的出售股权动机时，经营业绩差的公司会选择推迟不好信息的披露。

二、文章结构：分为五个部分：第一部分是引言，第二部分是相关文献研究背景和假设的建立，第三部分是样本选取过程，第四部分是测试结果的讨论，最后一部分是得出结论。

三、主要观点：1.当业绩差的公司的大股东具有较高的出售股权动机时，他们会对管理层施加影响以使他们拖延对不利消息的披露，尤其是当企业面临的诉讼风险比较低时。

2.企业信息的披露会通过两种方式影响在IPO前持有企业股份的股东出售股权时的股价：一是在企业信息发布后，披露直接影响股价，二是披露会影响企业信息的不确定性，这会导致股价对出售情况的反应。

3.只在企业面临的诉讼风险较低、不确定性较大时才会出现较高的股权出售动机会影响企业披露的情形。

4.只有对企业盈利的不利股价反应能够被推迟到IPO前持有股权的股东出售他们的股票之后才能说推迟不利信息的披露对这些股东有益。

四、研究设计：（一）1.建立假说1A：企业在IPO期间发表不利预测的倾向要低于在其他正常期间发表的倾向。

假说1B：企业在IPO期间发表利好预测的倾向要高于在其他正常期间发表的倾向。

American Finance AssociationA Survey of Corporate GovernanceAuthor(s): Andrei Shleifer and Robert W. VishnySource: The Journal of Finance, Vol. 52, No. 2 (Jun., 1997), pp. 737-783Published by: Blackwell Publishing for the American Finance AssociationStable URL: /stable/2329497Accessed: 19/09/2010 22:38Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at/action/showPublisher?publisherCode=black.Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@.Blackwell Publishing and American Finance Association are collaborating with JSTOR to digitize, preserveand extend access to The Journal of Finance.。

Large shareholders and accounting research qOle-Kristian HopeUniversity of Toronto,Rotman School of Management,CanadaA R T I C L E I N F O Article history:Received 5April 2012Accepted 11July 2012Available online 29January 2013JEL classification:G30G32G38M20M41Keywords:Large shareholdersAgency costsControlling ownersMinority ownersPrivate firmsInternational A B S T R A C TLarge shareholders are a potentially very important element of firms’corpo-rate governance system.Whereas analytical research is typically vague on who these large shareholders are,in practice there are important variations in the types of large owners (and the different types of large owners could play very different governance roles).After briefly reviewing the standard agency cost arguments,in this article I emphasize the heterogeneity of concentrated ownership and in particular focus on the roles of families,institutions,govern-ments,and employee ownership.I also discuss the role of large shareholders in private (i.e.,unlisted)firms,where ownership tends to be more concentrated than in publicly traded firms.Finally,I briefly discuss variations in ownership structures across selected countries.Ó2013China Journal of Accounting Research.Founded by Sun Yat-sen University and City University of Hong Kong.Production and hosting by Elsevier B.V.All rights reserved.1.IntroductionThis article is based on my keynote address at the 2012CJAR Special Issue Symposium at CEIBS in Shang-hai.The topic of the conference was “large shareholders ”and I was honored to be given the opportunity to1755-3091/$-see front matter Ó2013China Journal of Accounting Research.Founded by Sun Yat-sen University and City University of Hong Kong.Production and hosting by Elsevier B.V.All rights reserved./10.1016/j.cjar.2012.12.002qThis article has been prepared for the China Journal of Accounting Research and forms the basis for my CJAR Special Issue Symposium presentation (March 30,2012).I appreciate useful comments from Heather Li and acknowledge the financial support of the Deloitte Professorship.4O.-K.Hope/China Journal of Accounting Research6(2013)3–20make some comments on how large shareholders are important for(accounting)research.I should hasten to say that there are several well-cited survey studies on corporate governance in accounting,economics,finance, and management.Thus,in this paper I will not attempt a complete survey on the literature on large sharehold-ers.Instead,I have decided to focus on one particular aspect–the heterogeneity of large shareholders.We tell our PhD students that they should base their research on theory to the extent possible.At least in financial accounting the“theory”that is referred to is often analytical economics-based research.At the Rot-man School we have the same emphasis on theory and I am personally a strong believer in anchoring your work in theory.However,most analytical models are vague(to put it mildly)when describing exactly who the large shareholders are and how they act.As this article will highlight,there is in fact rather considerable diversity in the types of large shareholders we observe,and it is very likely that these may have different effects on outcomes of interest to accounting researchers.Hence the reader can consider this article also as a call for “attention to the context”in which the study is conducted.For example,I would encourage“case-based”type studies that delve deeper into one particular form of large shareholder,such as state-owned enterprises in China.I would like to offer three brief caveats.First,as already mentioned there are other,more comprehensive surveys on corporate governance issues and I would recommend that readers consult these if relevant.Second, although I consider several different types of large shareholders I could clearly have included additional types (e.g.,the effect of foreign shareholders).Finally,there are important measurement issues in defining large shareholders(using cut-offs;multiple large owners;concentration ratios;ownership percentage versus voting rights;considering potential nonlinearities;organizational form;etc.).Section2provides a brief review of the classic Jensen and Meckling(1976)arguments and discusses both vertical and horizontal agency costs.It also discusses the role of the second-largest shareholders and examines how large shareholders exercise their monitoring in practice.Section3focuses on who the large shareholders are.The chapter considers the roles of families,institutions,governments,and employee rge shareholders are particularly prominent in private(i.e.,unlisted)firms,and Section4summarizes relevant research on these economically very importantfirms.Section5contains a discussion of variations across selected countries in the types of dominating ownership,and Section6concludes.2.Overview of large shareholders and agency costs2.1.Brief review of Jensen and Meckling(1976)As this conference is motivated to a large extent by Jensen and Meckling(1976),it is worthwhile tofirst briefly revisit and review their seminal study.1Jensen and Meckling define an agency relationship as a contract under which one or more persons(the principal(s))engage another person(the agent)to perform some service on their behalf which involves delegating some decision making authority to the agent.If both parties are util-ity maximizers there is good reason to believe that the agent will not always act in the best interests of the principal.The principal can limit divergences from his interest by establishing appropriate incentives for the agent and by incurring monitoring costs designed to limit the value-reducing activities of the agent.2 If a wholly ownedfirm is managed by the owner,he will make decisions which maximize his utility.This situation is of course unusual other than for the smallest privatefirms and by definition not observed in pub-licly traded companies.In such cases,Jensen and Meckling argue that agency costs will be generated by the divergence between his interest and those of the outside shareholders,as he will then bear only a fraction of the costs of any non-pecuniary benefits he takes out in maximizing his own utility.Put differently,as the owner–manager’s fraction of the equity falls,his fractional claim on the outcomes falls and this will tend to encourage him to appropriate larger amounts of the corporate resources in the form of perquisites.This also makes it 1Jensen and Meckling’s article was in part motivated by the observation by Adam Smith(1776)that“The directors of such[joint-stock] companies,however,being the managers rather of other people’s money than of their own,it cannot be well expected,that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own... Negligence and profusion,therefore,must always prevail,more or less,in the management of the affairs of such a company.”2In some situations it will pay the agent to expend resources to guarantee that he will not take certain actions which would harm the principal or to ensure that the principal will be compensated if he does take such actions(referred to as“bonding”).O.-K.Hope/China Journal of Accounting Research6(2013)3–205desirable for the minority shareholders to expend more resources in monitoring his behavior.3Important for us in accounting,this is clearly one of the reasons for the demand for accounting-related information.In fact, the genesis of accounting was in the“stewardship role”it can play in monitoring agents(see,e.g.,Gjesdal, 1981for a nice discussion).It is only more recently that the“valuation role”of accounting information has gained in prominence(and may well be the dominating role today).Related to the stewardship role(or governance)role of accounting,Jensen and Meckling argue that their theory can explain“why accounting reports would be provided voluntarily to creditors and stockholders,and why independent auditors would be engaged by management to testify to the accuracy and correctness of such reports.”2.2.More on the role of ownership concentration(or importance of large shareholders)There are two common approaches to corporate governance throughout most of the world(e.g.,Shleifer and Vishny,1997).First,investors’rights are protected to varying degrees across the world through the legal process and legal environment.The second major approach,and the focus of this article,is ownership by large investors.Research provides evidence that managers,when left unmonitored,are more likely to manage earnings, commit fraud,or make suboptimal investment decisions(e.g.,Biddle and Hilary,2006;Hope and Thomas, 2008).Thus,shareholder monitoring is an important mechanism by which agency costs can be reduced.How-ever,while all shareholders have the responsibility to monitor managerial activities,the benefits of doing so by any individual shareholder are proportional to the percentage of shares owned(Jensen and Meckling,1976; Shleifer and Vishny,1997).Put another way,when ownership is widely dispersed,it is economically less fea-sible for any individual shareholder to incur significant monitoring costs,because she will receive only a small portion of benefits.Similarly,when ownership is dispersed,it is harder for shareholders to monitor managerial actions.Thus,as the percentage of ownership by individual shareholders increases(i.e.,concentration increases), the more willing individual shareholders are to incur necessary monitoring costs.That is,when ownership is limited to one or a few individuals,it is easier and more efficient for those individuals to directly monitor managerial actions.This is the typical“vertical agency cost”argument(i.e.,conflicts between managers and owners)and leads to the general prediction that agency costs are expected to be lower as ownership concen-tration increases.4Potential manager–owner conflicts are not the only relevant issues.Horizontal agency costs relate to how large shareholders can decrease afirm’s value through extracting private benefit from the minority sharehold-ers(e.g.,La Porta et al.,1999).Morck et al.(1988)argue that increased ownership concentration may entrench managers,as they are increasingly less subject to governance by boards of directors and to discipline by the market for corporate control.Controlling shareholders may either engage in outright expropriation from self-dealing transactions or exercise de facto expropriation through the pursuit of objectives that are not profit-maximizing in return for personal utilities.These controlling shareholders may attempt to hide these activities from other stakeholders(e.g.,minority shareholders and creditors)by manipulating reported perfor-mance(an issue of obvious interest to accountants).In other words,a controlling owner can increase agency costs via the positive association with private benefits of control(e.g.,Hope et al.,2012a).To summarize the discussion,the presence of a controlling owner represents forces that work in opposite directions.For a researcher,this is both a challenge and an opportunity.It is an opportunity if the researcher is able to specify ex ante which set of agency costs is likely to be most significant.For example,in countries with less legal protection of the minority shareholders the main agency problem often exists between control-ling shareholders and minority shareholders.3Jensen and Meckling consider the term monitoring to include more than just measuring or observing the behavior of the agent.It includes efforts on the part of the principal to“control”the behavior of the agent through budget restrictions,compensation policies, operating rules,etc.4Furthermore,controlling shareholders could enable a long investment horizon which allows the building of strong relationships between thefirms and outside providers of capital(Ellul et al.,2009).In fact,a controlling shareholder could increase business focus and make contracting negotiations easier.6O.-K.Hope/China Journal of Accounting Research6(2013)3–202.3.The role of the second-largest shareholderWhile the previous discussion explains the need for shareholders to monitor managers,the literature also establishes the need for shareholders to monitor one another.For example,controlling shareholders have the ability to exploit minority shareholders in closely-held corporations(e.g.,Nagar et al.,2011).Such exploita-tion can include higher compensation to controlling shareholders,misappropriation of assets,and dilution of minority shareholders’interests through the issuance of stock or dividends(Gogineni et al.,2010).As the own-ership stake of a second shareholder increases,so does her ability and willingness to effectively monitor the largest shareholder.The monitoring activities by the second largest shareholder would be similar to those used by the largest shareholder to monitor managers(Hope et al.,2012a).Pagano and Roell(1998)specify conditions under which large shareholders monitor each other,reducing expropriation and improvingfirm performance.They predict that expropriation of minority shareholders is likely to be less severe when the ownership stake of non-controlling shareholders is more concentrated,as such concentration makes it easier and more effective to monitor the controlling shareholder.This is the typical “horizontal agency cost”argument(i.e.,conflicts between majority and minority shareholders)and leads to the prediction that as ownership by the second largest shareholder increases,agency costs decrease.2.4.How do large shareholders exercise their monitoring?Oftenfinance and accounting research is vague on the mechanisms through which monitoring happens.In practice monitoring by a large shareholder could take many forms.Perhaps the most commonly discussed means of monitoring discussed in the literature involves a large shareholder having a seat on the board.Sev-eral studies show in a variety of contexts the board’s role in monitoring managers(e.g.,Fama,1980;Fama and Jensen,1983;Adams et al.,2010).Other forms of direct monitoring would be a large shareholder actively par-ticipating in thefirm’s operations or having routine meetings with managers.As the proportion of ownership increases,the more beneficial it is for large shareholders to engage in these types of costly direct monitoring rge shareholders can also serve to block business decisions that may be considered suboptimal (e.g.,aggressive expansion through negative net present value projects).Doing so involves an investment in time and expertise by the shareholder to understand the consequences of major business rge shareholders are also likely to have more control over thefirm’s dividend(or capital distribution)policy, as a way to further discipline managers’actions.3.Who are the large shareholders?Does it matter?Analytical research on large shareholders tends to be rather generic and often does not consider that there may be very different types of large shareholders.There is surprisingly limited extant research on how different groups of large shareholders can affect corporate outcomes(e.g.,financial reporting quality).5Here I briefly consider research on the following owner types:families(including the CEO as owner),institutional investors, governments,and employees.3.1.Family ownershipA large fraction of businesses throughout the world are organized around families and there is a relatively large literature on family ownership(Bertrand and Schoar,2006).Most of this research in on publicly listed companies.For example,family-controlledfirms dominate in East Asia and Latin America.As an indication of the importance of familyfirms,La Porta et al.(1999)report that65%of the20largestfirms in Argentina have at least a20%family stake;in Hong Kong this fraction is70%.In contrast,in Japan the corresponding number is5%.5An exception is Cronqvist and Fahlenbrach(2009).They examine effects of different types of institutional investors in the US andfind that investor type has significant effects on several corporate policies.The only study I’m aware of in accounting is Dou et al.(2012)who follow an approach similar to Cronqvist and Fahlenbrach(2009)and examine the effects of large shareholders on accounting practices for a large sample of USfirms over the2001–2009period.O.-K.Hope/China Journal of Accounting Research6(2013)3–207 If a researcher is really interested in examining the effects of family ownership,it would seem that private (i.e.,unlisted)firms offer even more fertile ground for research.Section4discusses privatefirms in more detail.A stream of research has examined“familyfirms”included in the S&P500.This line of research is primarily motivated by the fact that,notwithstanding the oft-cited idea that US publiclyfirms have widely dispersed ownership,Shleifer and Vishny(1986)(and others)document that large shareholders are common and,in par-ticular,note that founding families continue to hold equity stakes and board seats in nearly33%of the For-tune500firms.In other words,USfirms may not be as different from those observed elsewhere in the world as thought by many.These founding families represent a unique class of long-term shareholders that hold poorly diversified portfolios and often control senior management positions.Family owners can thus exert influence and control over thefirm,potentially leading to performance differences with nonfamilyfirms.In a widely cited study,Anderson and Reeb(2003)investigate the relation between founding-family own-ership andfirm performance.Theyfind that,contrary to their conjecture,familyfirms perform better than nonfamilyfirms.Additional analyses reveal that the relation between family holdings andfirm performance is nonlinear and that when family members serve as CEO,performance is better than with outside CEOs. Overall,their results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership,suggesting that family ownership may be an effective organizational structure.Ali et al.(2007)recognize that,compared with nonfamilyfirms,familyfirms face less severe agency prob-lems due to the separation of ownership and management.However,they face more severe agency problems that arise between controlling and non-controlling shareholders.These conflicting effects are often referred to as“entrenchment versus alignment.”Thus it is not clear what to predict regarding familyfirms’disclosure practices relative to otherfiing a sample of only S&P500firms,Ali et al.(2007)conclude that family firms report better quality earnings,are more likely to warn for a given magnitude of bad news,but make fewer disclosures about their corporate governance practices.Consistent with familyfirms making better financial disclosures,the authorsfind that familyfirms have larger analyst following,more informative ana-lysts’forecasts,and smaller bid–ask spreads.6It is far from clear that the abovefindings should be generalized to other settings,even in the United States. First,although thefirms classified as“familyfirms”by definition meet the definition of a familyfirm for these studies,others may employ a higher threshold for family ownership.Given the nonlinearities documented in the US setting,it is thus highly unclear what to expect in very different environments and with much higher family ownership(e.g.,in privatefirms).Even more importantly,conflicting evidence exists on whether having family ownership increases or decreases afirm’s value,and it seems to be country dependent.Bertrand and Schoar(2006)conclude that there is no strong empirical evidence for the economic superiority of family-con-trolled businesses.According to Bertrand and Schoar(2006),familyfirms appear to underperform relative to nonfamilyfirms in most countries:for example,Claessens et al.(2002)for several Southeast Asian countries; Morck et al.(2000)for Canada;and Cronqvist and Nilsson(2003)for Sweden.Also,Bloom and Van Reenen (2007)find that familyfirms in France,Germany,the United Kingdom and the United States are systemat-ically associated with worse managerial practices.Bertrand and Schoar(2006)note two important exceptions. Khanna and Palepu(2000)find that business groups in India,which are for the most part family-controlled, perform better than stand-alonefirms in matched industries(see more on this below);and Sraer and Thesmar (2007)whofind a premium for familyfirms in France.3.1.1.The role of the CEO in familyfirmsThere is comparatively limited research on the role of the CEO as part of the dominant family.A dominant belief in the literature is that as CEO ownership increases,her incentives align more with those of other share-holders,reducing the agency problem that arises from separation of ownership and control(e.g.,Jensen and Meckling,1976).This is known as the alignment effect which suggests reduced agency costs.6In a closely related study,Chen et al.(2008)find that,compared with nonfamilyfirms,familyfirms provide fewer earnings forecasts and conference calls,but more earnings warnings.The authors interpret the former to be consistent with family owners having a longer investment horizon,better monitoring of management,and lower information asymmetry between owners and managers,they interpret the higher likelihood of earnings warnings to be consistent with family owners having greater litigation and reputation cost concerns.In another related paper,Wang(2006)finds that founding family ownership is associated with higher earnings quality in S&P500firms(but also shows that the relation is non-linear).8O.-K.Hope/China Journal of Accounting Research6(2013)3–20Major shareholders are often family members of the CEO for privatefirms(Hope et al.,2012a).There are interesting competing hypotheses when the CEO is related to the major shareholder.Because of the family relationship,these shareholders no longer act as independent monitors in disciplining CEOs’decisions.In addition,family-controlledfirms are likely to suffer from greater horizontal agency costs.It may be easier for major shareholders,who are family members of the CEO,to extract private benefits from minority share-holders or other stakeholders.The reason it may be easier to extract these benefits is that major family owners typically have strong influence over choosing members of the board.Consequently,the monitoring effective-ness of the board may be impaired when its composition is determined primarily by the CEO’s family.These arguments would support the idea that agency costs will increase when there is a family relation between the CEO and major shareholder(Hope et al.,2012a).An alternative view is that family member CEOs are less likely to act in ways that opportunistically harm other family members.That is,installing a family member as the CEO could be a mechanism through which family-owned companies can increase their monitoring of management and reduce the need for external mon-itoring.If this effect dominates,the agency costs are smaller when the CEO is a family member because famil-ial ties are likely to create closer alignment of the CEO’s preferences with those of family owners.In conclusion,vertical and horizontal agency costs supply opposite predictions for effects of familyfirms.In addition,there are strong differences in the degree to which families control business,to what extent the CEO comes from the dominant family,and in other institutional arrangements.In short,there is ample“tension”in terms of predictions and plenty of room for future research!3.1.2.Hope et al.(2012a)on agency conflicts in(private)familyfirmsHope et al.(2012a)are interested in understanding how agency conflicts in privatefirms arise through own-ership structures and family relationships.They analyze auditors’increase of effort andfirms’choice of audi-tors in situations with higher level of agency conflicts.For a large sample of private Norwegianfirms,they use data obtained through special permission by the government to measure direct and ultimate ownership for each shareholder as well as extended family relationships.Family relationships are measured based on mar-riage and blood lines,going back four generations and extending out to fourth cousin,and cover all share-holders,board members,and CEOs.The authorsfind that(excess)audit fees,their proxy for audit effort in the face of agency conflicts,vary as hypothesized withfirm-level characteristics related to ownership structures and family relationships.Specifi-cally,they show that fees relate negatively to ownership concentration and to the extent of ownership by the second-largest shareholder.Audit fees also relate negatively to the portion of shares held by the CEO,consis-tent with ownership aligning the incentives of the CEO and other stakeholders.Audit fees are further posi-tively associated with family relationships between the CEO and the major shareholder(a signal of reduced monitoring and a situation in which expropriation by the family/major shareholder is easier).With respect to board independence,theyfind that audit fees decline as the number of board members related to the largest shareholder increases,consistent with fewer agency conflicts between owners and the board.In contrast,as the number of board members related to the CEO increases,fees increase,suggesting less board independence and greater agency conflicts.Hope et al.(2012a)report two interesting sets of results for the demand for Big4auditor.First,for agency settings that are not CEO family-related,they observe results consistent with those obtained for the auditor effort tests.Specifically,the propensity to hire a Big4auditor increases as ownership concentration decreases, ownership of the second largest owner decreases,and the major shareholder’s family influence on the board decreases.These results are consistent with the demand for a Big4auditor being greater in higher agency cost settings.They do notfind significant evidence of a relation between hiring a Big4auditor and the fraction of shares owned by the CEO for the main tests but they do in sensitivity tests.The authorsfind no association between the choice to hire a Big4auditor and CEO family-related agency variables.Specifically,there is no significant evidence that the demand for a Big4auditor is affected when a family relationship exists between the CEO and the major shareholder or as the number of board members related to the CEO increases.While some CEOs in family-related agency settings may wish to signal more credible reporting by hiring a Big4auditor,other CEOs in these settings may feel a Big4auditor is eitherO.-K.Hope/China Journal of Accounting Research6(2013)3–209 unnecessary given close family ties or unwanted because of the gains from extracting private benefits which could be reduced by a Big4audit.3.2.Institutional ownershipInstitutional investors such as pension funds and mutual funds are often“large”shareholders.In addition, they are typically viewed as“sophisticated investors”in the literature.The extant theoretical literature gener-ally predicts large institutional investors as an efficient form of corporate governance.However,large institu-tional holders are not using their own money to make investments.Thus,with regulatory constraints or lack of incentives,Coffee(1991)argues that institutional shareholders tend to be passive.Prior research has documented that sophisticated investors behave differently from other,less informed investors(e.g.,Callen et al.,2005).Sophisticated investors have superior abilities and consequently can learn better from experience(Bonner and Walker,1994).Economic incentives are potentially important as well. Institutional investors have large investment portfolios and,therefore,have much more to gain or lose in absolute dollar terms from their investment decisions.Furthermore,the costs of engaging in in-depth firm analysis are lower for institutions,in part because of their superior access to databases and analytical tools.Research documents the existence of distinct groups among institutions that differ in their objectives and information needs.Bushee(1998)classifies institutions into three groups–transient,dedicated,and quasi-indexers.“Transient”institutions have high portfolio turnover and highly diversified portfolio holdings.They focus on the short term and make investments based on the likelihood of short-term trading profits.According to Bushee(2001),the short investment horizons of transient investors create little incentive for them to gather information relevant to long-run value.In contrast,“dedicated”investors and“quasi-indexers”focus on the long term and provide stable owner-ship tofirms.Dedicated investors hold large stakes in a limited number offirms.Such ownership creates greater incentives to invest in monitoring management and to rely on information beyond current earnings to assess managers’performance.Quasi-indexers generally follow indexing and buy-and-hold strategies, and are characterized by high diversification.Although quasi-indexers follow a passive investment strategy, these investors may also have strong incentives to monitor management to ensure that it is acting in the best interest of thefirm.Many studies report results that are consistent with a superior ability of sophisticated investors to gather, analyze,and price information.Price(1998)finds that informed investors appear to make greater use of accounting disclosures and non-earnings information to form more precise earnings expectations.Bonner et al.(2003)document that sophisticated investors incorporate the information inherent in the relative accu-racy of analyst forecasts to a greater extent than less informed investors.In addition,Bhattacharya et al. (2007)provide evidence that sophisticated investors demonstrate less behavioral bias in the way they process pro forma earnings information relative to more sophisticated investors.Finally,the efficiency of afirm’s stock price is associated with the degree of sophistication of thefirm’s marginal investor(e.g.,Bartov et al.,2000).As an example of my own work that includes institutional investors,Chen et al.(2012)shows that the dif-ference between closed-end country funds’net asset values and their trading prices(i.e.,the fund discount)is positively associated with the earnings opacity of the underlying companies.In conditional analyses they fur-therfind that the positive relation between earnings opacity and fund discounts is weaker for those funds with a higher level of institutional ownership.In other words,investors who are better equipped at information acquisition than other investors are able to overcome some of the information disadvantage of being“non-local.”In an earlier study,Callen et al.(2005)find that the variance contribution of foreign earnings increases with the level of investment by long-term(but not short-term)institutional investors.To sum,there is strong evidence that institutional investors are an important class of large shareholders,in part because of their greater expertise in analyzing accounting information.There is also extensive evidence that there is important variation among the different classes of institutional investors.Thus,yet again we con-clude that there is significant diversity among even subgroups of large shareholders.。

外文翻译原文Performance Pay and Top-Management Incentives.Material Source: EBSCO Author: Michael C· Jensen The conflict of interest between shareholders of a publicly owned corporation and the corporation’s chief executive officer (CEO)is a classic example of a principal-agent problem. If shareholders had complete information regarding the CEO’s activities and the firm’s investment opportunities, they could design a contract specifying and enforcing the managerial action to be taken in each state of the world. Managerial actions and investment opportunities are not, however, perfectly observable by shareholders; indeed ,shareholders do not often know what actions the CEO can take or which of these actions will increase shareholder wealth. In these situations, agency theory predicts that compensation policy will be designed to give the manager incentives to select and implement actions that increase shareholder wealth.Shareholders want CEOs to take particular actions—for example, deciding which issue to work on, which project to pursue, and which to drop—whenever the expected return on the action exceeds the expected costs. But the CEO compares only his private gain and cost from pursuing a particular activity. If one abstracts from the effects of CEO risk aversion, compensation policy that ties the CEO’s welfare to shareholder wealth helps align the private and social costs and benefits of alternative actions and thus provides incentives for CEOs to take appropriate actions. Shareholder wealth is affected by many factors in addition to the CEO, including actions of other executives and employees, demand and supply conditions, and public policy. It is appropriate, however ,to pay CEOs on the basis of shareholder wealth since that is the objective of shareholders.There are many mechanisms through which compensation policy can provide value-increasing incentives, including performance-based bonuses and salary revisions, stock options, and performance-based dismissal decisions. The purpose of this paper is to estimate the magnitude of the incentives provided by each of these mechanisms. Our estimates imply that each $1,000 change in shareholder wealthcorresponds to an average increase in this year’s and next year’s salary and bonus of about two cents. We also estimate the CEO wealth consequences associated with salary revisions,outstanding stock options, and performance-related dismissals; our upper-bound estimate of the total change in the CEO’s wealth from these sources that are under direct control of the board of directors is about 75¢ per $1,000 change in shareholder wealth.Stock ownership is another way an executive’s wealth varies with the value of the firm. In our sample CEOs hold a median of about 0.25 percent of th eir firms’ common stock, including exercisable stock options and shares held by family members or connected trusts. Thus the value of the stock owned by the median CEO changes by $2.50whenever the value of the firm changes by$1,000.Therefore,our final all inclusive estimate of the pay-performance sensitivity—including compensationDismissal, and stockholdings—is about $3.25 per $1,000 change in shareholder wealth.In large firms CEOs tend to own less stock and have less compensation-based incentives than CEOs in smaller firms. In particular, our all-inclusive estimate of the pay-performance sensitivity for CEOs in firms in the top half of our sample (ranked by market value) is $1.85 per $1,000, compared to $8.05 per $1,000 for CEOs in firms in the bottom half of our sample.We believe that our results are inconsistent with the implications of formal agency models of optimal contracting. The empirical relation between the pay of top-level executives and firm performance, while positive and statistically significant, is small for an occupation in which incentive pay is expected to play an important role. In addition ,our estimates suggest that dismissals are not an important source of managerial incentives since the increases in dismissal probability due to poor performance and the penalties associated with dismissal are both small. Executive inside stock ownership can provide incentives, but these holdings are not generally controlled by the corporate board, and the majority of top executives have small personal stockholdings.Our results are consistent with several alternative hypotheses; CEOs may be unimportant inputs in the production process, for example, or their actions may be easily monitored and evaluated by corporate boards. We offer an additional hypothesis relating to the role of political forces in the contracting process that implicitly regulate executive compensation by constraining the type of contractsthat can be written between management and shareholders. These political forces, operating both in the political sector and within organizations, appear to be important but are difficult to document because they operate in informal and indirect ways. Public disapproval of high rewards seems to have truncated the upper tail of the earnings distribution of corporate executives. Equilibrium in the managerial labor market then prohibits large penalties for poor performance and as a result the dependence of pay on performance is decreased. Our findings that the pay-performance relation, the raw variability of pay changes, and inflation-adjusted pay levels have declined substantially since the 1930s are consistent with such implicit regulation.We define the pay-performance sensitivity, b, as the dollar change in the CEO’s wealth associate d with a dollar change in the wealth of shareholders. We interpret higher b’s as indicating a closer alignment of interests between the CEO and his shareholders. Suppose, for example, that a CEO is considering a nonproductive but costly “pet project” th at he values at $100,000 but that will diminish the value of his firm’s equity by $10million. The CEO will avoid this project if his pay-performance sensitivity exceeds b=.01(through some combination of incentive compensation, options, stock ownership, or probability of being fired for poor stock price performance) but will adopt the project if b< .01.The pay-performance sensitivity is estimated by following all 2,213 CEOs listed in the Executive Compensation Surveys published in Forbes from 1974 to 1986. These surveys include executives serving in 1,295 corporations, for a total of 10,400 CEO-years of data. We match these compensation data to fiscal year corporate performance data obtained from the data files of the Comp stat and the Center for Research in Security Prices (CRSP). After observations with missing data are eliminated, the final sample contains 7,750 yearly “first differences” in compensation and includes 1,688 executives from 1,049 corporations. Fiscal year stock returns are unavailable for 219 of the 7,750observations; calendar-year returns are used in these cases. (Deleting these 219 observations does not affect the results.)1. On average, each $1,000 change in shareholder wealth corresponds to an increase in this year's and next year's salary and bonus of about two cents. The CEO's wealth due to his cash compensation—defined as his total compensation plus the discounted present value of the change in his salary and bonus—changes by about 30￠per $1,000 change in shareholder wealth. In addition, the value of theCEO's stock options—defined as the value of the outstanding stock options plus the gains from exercising options—changes by 15￠per $1,000. Our final upper-bound estimate of the average compensation-related wealth consequences of a $1,000 change in shareholder value is 45￠for the full sample, 40￠for large firms, and 90￠for small firms.2. Our weighted-average estimate of the CEO's dismissal-related wealth consequences of each $1,000 shareholder loss for an average-size firm with — 50 percent net-of-market returns for two consecutive years is 30￠for the full sample, 5￠for large firms, and $2.25 for small firms. Therefore, the total pay-performance sensitivity—including both pay and dismissal—is about 75￠per $1,000 change in shareholder wealth for the full sample (45￠and $3.15 per $1,000 for large and small firms, respectively).3. The largest CEO performance incentives come from ownership of their firms' stock, but such holdings are small and declining. Median 1986 inside stockholdings for 746 CEOs in the Forbes compensation survey are 0.25 percent, and 80 percent of these CEOs hold less than 1.4 percent of their firms' shares. Median ownership for CEOs of large firms is 0.14 percent and for small firms is 0.49 percent. Adding the incentives generated by median CEO stockholdings to our previous estimates gives a total change in all CEO pay- and stock-related wealth of $3.25 per $1,000 change in shareholder wealth for the full sample, $1.85 per $1,000 for large firms, and $8.05 for small firms.4. Boards of directors do not vary the pay-performance sensitivity for CEOs with widely different inside stockholdings.5. Although bonuses represent 50 percent of CEO salary, such bonuses are awarded in ways that are not highly sensitive to performance as measured by changes in market value of equity, accounting earnings, or sales.6. The low variability of changes in CEO compensation reflects the fact that in spite of the apparent importance of bonuses in CEO compensation, they are not very variable from year to year. The frequency distributions of annual percentage changes in CEO salary plus bonus and total pay are comparable to that of a sample of 10,000 randomly selected workers. Thus our results indicating a weak relation between pay and performance are not due to boards of directors using measures of managerial performance that are unobservable to us.7. Median CEO inside stockholdings for the 120 largest NYSE firms fell by an order of magnitude from 0.3 percent in 1938 to 0.03 percent in 1984.8. The average standard deviation of pay changes for CEOs in the top quartile (by value) of all NYSE firms fell from $205,000 in 1934-38 to $127,000 in 1974-86.9. The pay-performance sensitivity for top-quartile CEOs fell by an order of magnitude from 17.5￠per $1,000 in 1934-38 to 1.9￠per $1,000 in 1974-86.10. The average salary plus bonus for top-quartile CEOs (in 1986 dollars) fell from $813,000 in 1934-38 to $645,000 in 1974-86, while the average market value of the sample firms doubled.The lack of strong pay-for-performance incentives for CEOs indicated by our evidence is puzzling. We hypothesize that political forces operating both in the public sector and inside organizations limit large payoffs for exceptional performance. Truncating the upper tail of the payoff distribution requires that the lower tail of the distribution also be truncated in order to maintain levels of compensation consistent with equilibrium in the managerial labor market. The resulting general absence of management incentives in public corporations presents a challenge for social scientists and compensation practitio译文绩效报酬与对高层管理的激励资料来源:EBSCO数据库作者：迈克尔.詹森股东的利益冲突的一家国有公司和公司的首席执行官(CEO)是一个典型的委托代理问题。

Multiple large shareholders and firm valueBenjamin Maury a ,Anete Pajusteb,*aDepartment of Finance and Statistics,Swedish School of Economics and Business Administration,P.O.Box 479,Helsinki 00101,Finland b Department of Finance,Stockholm School of Economics,P.O.Box 6501,Stockholm S-11383,SwedenReceived 24March 2003;accepted 8July 2004Available online 22September 2004AbstractThis paper investigates the effects of having multiple large shareholders on the valuation of fiing data on Finnish listed firms,we show,consistent with our model,that a more equal distribution of votes among large blockholders has a positive effect on firm value.This result is particularly strong in family-controlled firms suggesting that families (which typically have managerial or board representation)are more prone to private benefit extraction if they are not monitored by another strong blockholder.We also show that the relation between multiple blockholders and firm value is significantly affected by the identity of these blockholders.Ó2004Elsevier B.V.All rights reserved.JEL classification:G3;G32Keywords:Corporate governance;Ownership structure;Multiple blockholders;Firm value1.IntroductionRecent empirical work has shown that ownership is typically concentrated in the hands of a small number of large shareholders (e.g.,La Porta et al.,1999;Barca and Becht,2001).This evidence has shifted the focus from the traditional conflict of 0378-4266/$-see front matter Ó2004Elsevier B.V.All rights reserved.doi:10.1016/j.jbankfin.2004.07.002*Corresponding author.Tel.:+3716186301;fax:+468312327.E-mail address:anete.pajuste@hhs.se (A.Pajuste).Journal of Banking &Finance 29(2005)1813–1834/locate/jbf1814 B.Maury,A.Pajuste/Journal of Banking&Finance29(2005)1813–1834interest between managers and dispersed shareholders(Berle and Means,1932)to-wards an equally important agency conflict between large controlling shareholders and minority shareholders.On the one hand,large shareholders can benefit minority shareholders by monitoring managers(Shleifer and Vishny,1986,1997).On the other hand,large shareholders can be harmful if they pursue private goals that differ from profit maximization or if they reduce valuable managerial incentives(Shleifer and Vishny,1997;Burkart et al.,1997).In this paper,we address a different question: In which way do multiple large shareholders,as opposed to just one large share-holder,benefit or harm minority shareholders?Outside the United States,the presence of several large shareholders1with sub-stantial blocks of shares is common(Barca and Becht,2001).Data on5232Euro-pean companies collected by Faccio and Lang(2002)show that39%offirms have at least two blockholders that hold at least10%of the voting rights,and16%offirms have at least three blockholders.Therefore,it is important to study the allocation of control between multiple large shareholders,as well as its impact onfirm perform-ance.The theoretical literature provides models in which multiple blockholders com-pete for control(Bloch and Hege,2001),monitor the controlling shareholder (Winton,1993;Pagano and Ro¨ell,1998;Bolton and Von Thaden,1998),and form controlling coalitions to share private benefits(Zwiebel,1995;Pagano and Ro¨ell, 1998;Bennedsen and Wolfenzon,2000;Gomes and Novaes,2001).Empirical evidence on the effect of multiple large shareholders onfirm perform-ance has been limited.For Italy,Volpin(2002)provides evidence that valuation is higher when control is to some extent contestable as in the case in which a voting syndicate controls thefirm.Lehman and Weigand(2000)report that the presence of a strong second largest shareholder enhances profitability in German listed com-panies.Faccio et al.(2001)test the effect of multiple large shareholders on dividends. Theyfind that the presence of multiple large shareholders dampens expropriation in Europe(due to monitoring),but exacerbates it in Asia(due to collusion).Most of these empirical studies focus on the simple presence of multiple blockholders,and not on the characteristics of individual blockholders.We present a simple model in which multiple blockholders can have two different roles infirms.On the one hand,by holding a substantial voting block,a blockholder has the power and the incentives to monitor the largest shareholder and therefore the ability to reduce profit diversion.On the other hand,the blockholder can form a con-trolling coalition with other blockholders and share the diverted profit.One of the key contributions of this paper is the derivation of conditions under which the diver-sion of profits can be higher infirms with multiple blockholders than infirms with a single blockholder.Related to thefirst role,we hypothesize thatfirm value is posi-tively affected by the ability to challenge the largest block,i.e.,by contestability.Re-lated to the second role,we hypothesize thatfirm value is negatively affected by the presence of blockholders,who,by colluding,can increase the efficiency of private benefit extraction.1In this paper,terms large shareholder and blockholder are used interchangeably as synonyms.B.Maury,A.Pajuste/Journal of Banking&Finance29(2005)1813–18341815Using a sample of136non-financial Finnish listed companies that have at least one large shareholder with more than or equal to10%of the votes,wefind that the contestability of the largest shareholderÕs voting power(using different measures) has a positive effect onfirm value,as measured by TobinÕs Q.The data show that firm value increases when the voting power is distributed more equally.The contest-ability of control power is particularly important in family-controlledfirms.As fam-ilies typically have managerial or board representation,this result suggests thatfirm value can decrease if the outsidersÕability to monitor the insiders is low.Interestingly,wefind that a higher voting stake by another family is negatively re-lated tofirm value in family-controlledfirms,whereas a higher voting stake held by another non-family owner,typically afinancial institution,is positively related to firm value in family-controlledfirms.These results suggest that the incentives to col-lude with the largest shareholder or to monitor the largest shareholder are signifi-cantly affected by the type of the blockholder.Consistent with our model,we explain this result by suggesting that some coalitions(e.g.,two families)can make profit diversion easier.Meanwhile in other coalitions,expropriation can be more difficult.The paper proceeds as follows.Section2presents a model on the effects of mul-tiple large shareholders onfirm value,and derives testable hypotheses.Section3de-scribes the data set and variables.Section4presents regression results.Section5 offers robustness checks,and Section6concludes.2.Multiple blockholders andfirm value:A simple modelPrevious research shows that the presence of large shareholders,who can monitor the actions of the manager,can benefit minority shareholders(e.g.,Shleifer and Vishny,1986).Following this reasoning,multiple large shareholders can reduce profit diversion by monitoring the controlling shareholder(Pagano and Ro¨ell, 1998).The previous theoretical models,however,emphasize the simple presence of multiple blocks.In our model,we show how the identity and relative size of the blockholders can affect the level of private benefit extraction.In particular,we pre-sent the conditions under which the presence of another block can harm minority investors.We follow the model set-up in La Porta et al.(2002)and assume that the diversion of profits is inefficient–the controlling coalition receives sRIÀc(s,•)RI,where RI is thefirmÕs profit(I is the amount of cash invested with the gross rate of return R), c(s,•)is the cost-of-theft function,i.e.,the share of profit that is wasted when s is diverted.2We assume that c s>0and c ss>0,i.e.that the marginal cost of stealing is positive,and the marginal cost of stealing rises as more is stolen.Firm valuation is measured by Q=(1Às)R.2As in La Porta et al.(2002),we assume that the ownership structure has been chosen in the past. Alternatively,the ownership structure can be endogenized,as,for example,in Stulz(1988)or Shleifer and Wolfenzon(2002).1816 B.Maury,A.Pajuste/Journal of Banking&Finance29(2005)1813–1834 We assume that the largest blockholder is the manager,which is always included in the controlling coalition.3Infirms with professional managers,we still assume that the largest blockholder has the power to influence managerial decision-making, as well as tools to extract private benefits at the expense of minority shareholders.4 In the data,we observe that when the largest shareholder lacks managerial represen-tation,managers and board members themselves have very low ownership and con-trol stakes.Therefore,the aggregate holdings of top executives are not likely to alter the control power of the blockholders.Under these assumptions,the controlling coalition maximizesV C¼a nð1Àð1ÀkÞsÞRIþð1ÀkÞsRIÀcðs; ÞRI;ð1Þwhere a n is the sum of the cash-flow stakes held by the coalition partners,and k is the probability to recover the diverted profits,which we call the contestability of the con-trolling coalitionÕs power.The contestability increases with the voting power of the blockholders outside the coalition(v out).We assume that there is no additional cost to monitoring,i.e.,just by having a large minority stake(more than10%of the shares),the shareholder can order,for example,an audit,and,in so doing,the di-verted profits will be returned to thefirm with probability k.Thefirst term in(1) is the share of after-theft cashflows(or dividends),and the remaining two terms are the benefits from expropriation.The diverted profit is shared among coalition partners through efficient bargaining.5Thefirst order condition is given by¼Àð1ÀkÞa nþð1ÀkÞÀc sðs; Þ¼0;ð2ÞV Cswhich can be rewritten asc sðs; Þ¼ð1Àa nÞð1ÀkÞ:ð3ÞThe optimal s*is determined from Eq.(3).We assume that the parameters in the cost-of-theft function are such that all the optimal private benefits(s*)are within the limits sÃ2½0;^s ,where^s is the maximum fraction of the profits that can be diverted.We can now derive testable hypotheses for the ownership structures with multiple blockholders.First,assume that the marginal cost of stealing depends only on the number of coalition partners.In particular,assume that the marginal cost of stealing is the same or higher in the multiple blockholder case as compared to the one block-holder case.6In this case,the simple presence of multiple blocks reduces the private3This assumption stems from the fact that the largest block typically has higher voting power than the rest of the blocks combined in our sample.4In this paper,we focus on the agency problem between large shareholders and minority shareholders, disregarding the traditional principal–agent problem between professional managers and shareholders.5The relative distribution of diverted profits has no effect on the hypotheses tested in this paper. Therefore,this discussion,as well as the derivation of feasibility and sustainability conditions for the coalition formation is not reported but is available from the authors upon request.6The marginal cost of stealing can increase with the number of coalition members if it becomes harder to keep the diversion of profits secret with several partners.benefit extraction (see Fig.1A).For example,assume that the cost-of-theft function only depends on the diverted profit,s ,irrespective of the coalition structure.By dif-ferentiating the first order condition with respect to k (Eq.(4))and a n (Eq.(5)),and rearranging terms,we getd s Ãd k ¼À1Àa n c ss ðs ; Þ<0;ð4Þd s Ãd a n ¼Àð1Àk Þc ss ðs ; Þ<0:ð5ÞUnder current assumptions,the private benefits (s *)are strictly lower when there is more than one blockholder.If the controlling coalition consists of only the largest shareholder,a n =a 1,then private benefits are lower because the remaining block-holders have some monitoring power,k >0.If,in turn,the controlling coalition sup-presses the remaining contestability,i.e.,k =0,then private benefits are lower because the controlling coalition internalizes a larger fraction of cash-flow rights than in the single blockholder case,a n >a 1.The latter result is consistent with the alignment effect described by Bennedsen and Wolfenzon (2000).This gives us the first testable hypothesis:Hypothesis 1.An increase in the contestability of the controlling coalition Õs power should increase firm value.The assumption that the marginal cost of stealing increases with the number of coalition partners implies that the simple presence of multiple blockholders should have a positive effect on firm value.This is inconsistent with several previous studies (e.g.,Faccio et al.,2001)that find rather mixed results on the effect of the presence ofB.Maury,A.Pajuste /Journal of Banking &Finance 29(2005)1813–18341817multiple blockholders.In this paper,we argue that certain coalitions can actually re-duce the marginal cost of stealing either by(i)increasing the voting power of the coa-lition,or(ii)adding extra knowledge and resources for hiding the diversion of profits.For these two reasons,from now on,assume that the marginal cost of steal-ing is lower in the multiple blockholder case as compared to the one blockholder case;see Fig.1B.Higher voting power of the coalition may allow for more unanimous decision making and better hiding of profit diversion.Following this reasoning,we can ex-press the cost-of-theft function as c(s,v in),where v in is the total voting power of the coalition.We assume that c sv<0,i.e.the marginal cost of stealing decreases with the voting power of the coalition.Recall that k depends on the voting power of the blockholders outside the controlling coalition.This means that if a blockholder with higher voting power is added to the controlling coalition,the remaining contestabil-ity is lower than if a blockholder with lower voting power joins the coalition,d k/ d v in<0.Differentiating Eq.(3)with respect to v in,and rearranging terms,we getd sÃd v in ¼Àð1Àa nÞd kd v inÀc svc ss>0:ð6ÞThefirst term in the nominator of Eq.(6)shows that an increase in v in has an adverse effect on private benefits extraction because it reduces the remaining contestability(k decreases).The second term in the nominator shows that private benefits increase,as v in increases,because the marginal cost of stealing decreases due to higher voting power in the hands of the controlling coalition(c sv<0).This result suggests that the private benefits can be higher with multiple blockholders,if the negative effect of the added voting power(Eq.(6))is higher than the positive effect of the added cash-flow rights(Eq.(5));see Fig.1B.Results(5)and(6)combined,give us the sec-ond testable hypothesis:Hypothesis2.Firms with higher voting power and lower cash-flow rights held by the controlling coalition should have lowerfirm value.Hypothesis2suggests that high voting power gives discretion in private benefit extraction(low contestability),whereas low cash-flow ownership reduces the incen-tive effect.7The marginal cost of stealing can decrease with multiple blockholders if certain type of blockholders can add extra knowledge and resources for hiding the diversion of profits.We can express the cost-of-theft function as c(s,a),where a is the block-holderÕs ability to reduce the marginal cost of stealing,and hence,c sa<0.What kind of blockholders are capable of reducing the marginal cost of private benefit extrac-7This is consistent with both theoretical papers(Grossman and Hart,1988;Harris and Raviv,1988; Bennedsen and Wolfenzon,2000)and empirical work(La Porta et al.,2002;Claessens et al.,2002; Cronqvist and Nilsson,2003)showing that the negative effect of large shareholders is magnified if there is a substantial departure from one share–one vote.1818 B.Maury,A.Pajuste/Journal of Banking&Finance29(2005)1813–1834tion?We propose that the marginal cost of private benefit extraction is likely to be higher if the controlling coalition includes afinancial institution as compared to,for example,a family.Since the opportunity cost of getting caught for diverting the firmÕs proceeds presumably is higher forfinancial institutions that are supervised by regulatory authorities,diversion is less likely to be an attractive alternative.It is easier for two families to form a coalition and extract private benefits within the legal bounds,than for a family and,for example,a fund manager.The latter case is more likely to be a violation of law.Differentiating Eq.(3)with respect to a,and rearranging terms,we getd sÃd a ¼Àc sac ss>0:ð7ÞThis result suggests that the private benefits can be higher with multiple blockholders if the negative effect of the added ability to hide profits(Eq.(7))is higher than the positive incentive effect from higher cash-flow stake(Eq.(5)).We can now state thefinal testable hypothesis:Hypothesis3.Firm value should be lower if the controlling coalition is formed by blockholders that can jointly reduce the marginal cost of stealing.Related to Hypothesis3,the model could also be tested in a cross-country setting. If a certain institutional environment can reduce the marginal cost of stealing by coa-litions consisting of multiple blockholders,the model can explain differences in profit diversion among countries.For example,the model can explain the results in Faccio et al.(2001)suggesting that other large shareholders in Asian companies typically are long-standing allies of the largest shareholder(i.e.,they could reduce the marginal cost of stealing),while other large shareholders in Europe tend to monitor the largest shareholder.3.Data3.1.SampleWe collect data on ownership structures in Finnish listed companies during1993–2000.The total number offirm-year observations with ownership data is804.From the initial sample,we exclude banks and insurance companies.Since the focus of the paper is on the role of blockholders,we also excludefirm-years that do not have any blockholder with at least10%of the votes.As a result,our unbalanced panel used in the analyses consists of136firms and a total of612observations over the eight-year period.The main source for ownership data is the yearbook Po¨rssitieto.The book reports the cash-flow ownership and votes of the20largest shareholders ranked by owner-ship.Where the data are inadequate in the book,we usefirmsÕannual reports.We collect data on equity,votes,and the identity(type)of the three largest owners inB.Maury,A.Pajuste/Journal of Banking&Finance29(2005)1813–183418191820 B.Maury,A.Pajuste/Journal of Banking&Finance29(2005)1813–1834eachfirm.We classify the shareholders into the following types:family,corporation,financial institution,state,and other.Ownership by families is aggregated to include family members with the same surname.Families are assumed to own and vote col-lectively.Po¨rssitieto sums up the ownership offinancialfirms belonging to various banking and insurance groups,although these do not legally form a group.We use the same group classification.We have tried to identify the ultimate owners in Finnish listed companies.We in-clude indirect holdings through privatefirms by private persons when they are re-ported among the20largest shareholders.If a corporation orfinancial institution owns a company in our sample,we check further to see if it has a majority owner and report the ultimate ownerÕs type,if there is one.If the owner is a private corpo-ration and none of the insiders(board members and managers)have a controlling stake in it,we report this owner type as a corporation.The ownership data are at the end of thefinancial year.The fact that all ownership data are not from exactly the same date does not cause a problem,because the ownership structures tend to be stable in the vast majority offirms over the studied period.3.2.Variable descriptionsThe main proxy forfirm valuation(the Q of the model)is TobinÕs Q,which is de-fined as the market value of assets divided by the replacement cost of assets.To calcu-late the market value of assets,we take the sum of the market value of outstanding shares and the book value of debt.If afirm has more than one share class listed,we sum the market values of the different share classes.To estimate the market value of an unlisted share class,we use the price of the listed share class times the number of unlisted shares to get an implied value of the unlisted share class.8Our estimate of the denominator of TobinÕs Q,the replacement value of thefirmÕs assets,is the book value of total assets.To reduce the impact of extreme values,we censor the TobinÕs Q variable at the5th and95th percentiles,setting extreme values to the5th and95th per-centile values,respectively.The market value of equity,the book value of assets and all other accounting data for the control variables come from Datastream.If thefirm is not covered by Datastream,we add the accounting data from available annual reports.Hypothesis1suggested thatfirm valuation increases with the contestability of the largest shareholderÕs power.We use several proxies for the contestability of power, the k from the model.Thefirst is the Herfindahl index(HI_differences)measured by the sum of squares of the differences between thefirst and the second largest voting stakes,and the second and the third largest voting stakes,(Votes1ÀVotes2)2+(Votes2ÀVotes3)2.The second measure,called HI_concentration,is a proxy for the total concentration of the blockholdersÕvoting power.HI_concentra-tion is calculated as the sum of squares of the three largest voting stakes, 8One can argue that this estimation method could bias our measure of TobinÕs Q if there is a large difference in the prices of high and low voting shares(the voting premium).This is unlikely to be a problem in our data,because the voting premiums during the sample period generally have been low(see also Nenova,2003).B.Maury,A.Pajuste/Journal of Banking&Finance29(2005)1813–18341821 (Votes1)2+(Votes2)2+(Votes3)2.Both Herfindahl measures are transformed into logarithms to control for skewness,9and they are expected to have a negative rela-tion tofirm value.10Another measure of contestability used in our study is the Shapley value,which is the probability that a particular shareholder is pivotal in forming a majority coali-tion(more than50%of the votes).To calculate the Shapley value,the three largest blockholders are treated as individual players,while the rest are treated as an ‘‘ocean’’,for whom the Shapley value is the continuous version for oceanic games (Milnor and Shapley,1978).If the largest block holds more than50%of the votes, the Shapley value is equal to one.If the largest block does not hold a majority,the contestability of the largest shareholderÕs power increases with lower Shapley values. Hence,the relation between the Shapley value of the largest shareholder andfirm va-lue is expected to be negative.Although the Herfindahl indices and the Shapley value have more empirical ap-peal because they are continuous measures,we also introduce a dummy variable, called High contestability dummy,which takes into account the important legal minority shareholder rights assigned to shareholders with at least10%of shares, such as,for example,the right to request an extraordinary general meeting or ap-point an additional auditor.The High contestability dummy takes a value of one if the two largest shareholders cannot form a majority,and there is at least one more blockholder(with10%of the votes).This variable captures situations in which even with two blockholders forming a coalition,there is a blockholder who can contest the power of the controlling coalition.The relation between the High contestability dummy andfirm value is expected to be positive.Hypothesis2suggested thatfirm valuation decreases with a higher wedge between the voting power and the equity ownership.In particular,we want to disentangle the incentive effect associated with cash-flow rights from the entrenchment effect associ-ated with having control rights in excess of cash-flow ownership.We use the equity stake of the largest shareholder,to measure the incentive effect,and control-to-own-ership ratio,to measure the entrenchment effect that can arise when the largest share-holder has less equity participation than control.Four additional variables are introduced to control for factors that have been shown to have an impact on TobinÕs Q.The control variables includefirm size,finan-cial leverage,sales growth,and asset tangibility.Firm size is measured by the loga-rithm of total assets,and is expected to have a negative effect onfirm value as larger firms are,presumably,in a more mature stage of their life cycle.Leverage is meas-ured by the book value of all long-term liabilities divided by total assets.Leverage can play a disciplinary role by limiting the free cashflow at hand,and hence reduce profit diversion.However,leverage can also have a negative effect if it increases the risk offinancial distress and bankruptcy.Hence,we do not have a clear prediction on 9If HI_differences is zero,the log(HI_differences)is set equal to the lowest value of log(HI_differences) among all other observations.There is only one such case.10The results are qualitatively the same if we do not make the logarithmic transformations of the Herfindahl indices before including them in the regressions.1822 B.Maury,A.Pajuste/Journal of Banking&Finance29(2005)1813–1834the relation between leverage andfirm value.Sales growth is measured by the per-centage change in sales year-on-year.Since faster growing companies tend to have higher valuations,we expect a positive relation between sales growth andfirm value. Asset tangibility is the ratio of tangible assets divided by total assets.Firms with lower asset tangibility presumably have a higher proportion of intangible assets (e.g.,human capital)generating the cash-flows.Therefore,we expect a negative relation between asset tangibility and TobinÕs Q.We cap the leverage and sales growth variables at the5th and95th percentiles to reduce the weight of outliers.The regressions also include year dummies to account for time effects,and indus-try dummies to account for effects due to the nature offirmÕs industry.We follow the Helsinki Stock exchange classification of industry groups,and construct seven indus-try dummies:Food,Industry,Investment,Media,Telecommunications,Trade,and Other.3.3.Descriptive statisticsPanel A of Table1presents summary statistics for variables used in this study. The average TobinÕs Q across allfirm-years is1.39.The largest shareholder has on average42.3%of the voting rights and33.5%of the cash-flow rights.The average voting stakes of the second and third largest shareholders are11.6%and5.9%, respectively.The control-to-ownership ratio is the highest for the largest share-holder(1.36).The second largest shareholder has the average control-to-ownership ratio of1.24,and the third largest shareholder1.09.The ownership and control variables tend to be highly correlated,therefore,to avoid problems with multicol-linearity,the control contestability variables have to be estimated in separate regressions.The distribution of votes and cash-flow rights held by the largest shareholder in Finnish listed companies is displayed in Panel B of Table1.Family is the most com-mon ownership type among the largest shareholders(36.3%of total).Further clas-sification shows that if a family is the largest shareholder,it almost always has a representative among managers or board members.The second largest ownership category is corporations,controlling26.3%of thefirms.Financial institutions con-trol12.6%of thefirms but with smaller average stakes.The(unreported)distribution of ownership types among the second and third largest shareholders reveals that financial institutions dominate here,40.2%of the second largest shareholders and 50.3%of the third largest shareholders arefinancial institutions.To evaluate the stability of the ownership structures,we examine(though do not report in a table)the frequency distribution of changes in the voting power by the largest owners.Although the annual absolute change in control rights by the largest shareholder is within5%in79%of thefirm-years,the absolute change is greater than 10%in almost10%of thefirm-years.The percent offirm-years in which the absolute change in the second and third largest shareholderÕs voting power is within5% amounts to91%and96%,respectively.Thus,the variation in blockholdersÕstakes over time typically is low,but some changes do occur,particularly with the largest block.。

The business of polo马球业Cloney ponies克隆赛马How technology could transform an ancient sport技术如何改变一项古老运动Jan 5th 2013 | BUENOS AIRES | from the print editionIMAGINE a football match pitting 11 clones of Wayne Rooney against 11 more clones of the same spud-faced Manchester United striker. Even avid Wayne-watchers might find it a bit dull. But polo fans may one day be treated to something similar. No one is proposing to clone the stallions who wield the mallets, of course. But the stallions they sit on are another matter. Outstanding polo horses are hard to find and horribly expensive. Each world-class rider may have dozens, the best of which may cost more than $200,000 each.设想一场足球比赛，11位韦恩•鲁尼（Wayne Rooney）的克隆人对阵另外11位与这位曼联前锋长着同一张土豆脸的克隆人，就算韦恩的狂热观众也会觉得有点无趣。

但有朝一日，马球迷会遇到类似的事。

当然，无人建议克隆那些挥动长柄球棍、像种马一般健美的男子。

不过，他们胯下的种马则另当别论了。

JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS Vol.48,No.3,June2013,pp.887–917 COPYRIGHT2013,MICHAEL G.FOSTER SCHOOL OF BUSINESS,UNIVERSITY OF WASHINGTON,SEATTLE,WA98195 doi:10.1017/S0022109013000276CEO Entrenchment and Corporate Hedging: Evidence from the Oil and Gas IndustryPraveen Kumar and Ramon Rabinovitch∗AbstractUsing a unique data set with detailed information on the derivative positions of upstream oil and gasfirms during1996–2008,wefind that hedging intensity is positively related to factors that amplify chief executive officer(CEO)entrenchment and free cashflow agency costs.There is also robust evidence that hedging is motivated by the reduction offinancial distress and borrowing costs,and that it is influenced by both intrinsic cashflow risk and temporary spikes in commodity price volatility.We present a comprehensive perspective on the determinants of corporate hedging,and the results are consistent with the predictions of the risk management and agency costs literatures.I.IntroductionIn Modigliani-Miller(1958),hedging and risk management are,at best, value-neutral activities;yet,in practice,their economic significance is striking. For example,in the oil and gas industry the notional value of crude oil and natural gas contracts traded on the New York Mercantile Exchange(NYMEX)in the3rd quarter of2011was over$1.5trillion(afigure that includes only a fraction of the value of the over-the-counter traded contracts)and,similarly,Campello,Lin, Ma,and Zou(2011)report large notional values of outstanding interest rate and foreign currency derivatives held by nonfinancialfirms.In corroboration,firm-level analysis of hedging indicates that a sizable fraction of production is hedged, especially in industries with high commodity price volatility.1∗Kumar,pkumar@,Rabinovitch,ramon@,Bauer College of Business,University of Houston,334Melcher Hall,Houston,TX77204.We thank Murillo Campello(associate editor and referee)for very helpful comments.We also thank Yakov Amihud,Jonathan Berk,Sudheer Chava,Peter DeMarzo,Darrell Duffie,John Graham,Milton Harris,Kose John,Vince Kaminsky, Takao Kobayashi,Paul Malatesta(the editor),Ronald Masulis,Erwan Morellec,Annette Poulsen, Paul Povel,Sheridan Titman,Alex Triantis,Arthur Warga,and participants in seminars at the Indian Institute of Management(Bangalore),Texas A&M University,University of Colorado (Boulder),University of Houston,and University of Tokyo for helpful comments or discussions on the issues addressed in this paper.1In their sample of oil and gasfirms,Jin and Jorion(2006)report an average of33%of production being hedged.In our sample of nonintegrated oil and gasfirms,wefind that an average of46%of production is hedged,and this fraction is appreciably higher during the high-price-volatility periods of2006–2008.887888Journal of Financial and Quantitative AnalysisThere is a large literature that examines theoretically and empirically various motivations for hedging(see Fenn,Post,and Sharpe(1997)and Stulz(2003)). In particular,the literature theoretically motivates and empirically substantiates the role of bankruptcy and externalfinancing costs(Froot,Scharfstein,and Stein (FSS)(1993),Haushalter(2000),Campello et al.(2011)),managerial risk aver-sion(Stulz(1984),Tufano(1996)),and corporate tax structure(Smith and Stulz (1985),Graham and Smith(1999)).The alleviation offinancial contracting costs and tax optimization are consistent with the value-enhancing role of hedging activity(e.g.,Allayannis and Weston(2001)).However,while there are argu-ments in the literature that shareholder-manager agency conflicts influence corpo-rate risk management,to our knowledge there is no available direct evidence of their significance for corporate hedging.2In this paper,we examine the extent of risk management byfirms broadly by including the effects of managerial entrenchment and free cashflow agency costs on hedging activity.We argue that entrenched managers,subject to the free cash flow agency problem for“empire building”or overinvestment(Jensen(1986), (1993),Stulz(1990))and facing externalfinancing costs(FSS(1993)),should have an agency-based precautionary motive for hedging in addition to the risk management motivations considered in the literature.Building on this argument, we posit that,ceteris paribus,hedging intensity should be positively related to the level of entrenchment(or the extent of the free cashflow agency problem)and the persistence of cashflows but negatively related to cashflow availability.To explicate,suppose that entrenched managers derive private benefits from control by misusing free cashflows.If there were no transaction costs in exter-nalfinancing,then there is really no precautionary motive for ensuring access to internalfinancing resources,since managers’privately optimal projects could be externally funded.However,if access to externalfinancing is costlier than internally generated funds,then there is a precautionary motive for hedging by entrenched managers,because ensuring reliable access to free cashflows is espe-cially important to fund their empire-building initiatives.3Moreover,the expected marginal value from ensured access to free cashflows should be increasing with the private benefits of control.But hedging is costly because of direct transaction costs as well as the indirect costs of reduced upside profit potential from high commodity prices.Therefore,if cashflows are a stationary and positively serially correlated process(as indicated by the literature and confirmed by our data),then the hedging intensity should be negatively related to available free cashflows but 2Amihud and Lev(1981)find empirically that“manager-controlled”firms engage in conglomer-ate diversification more than managers in“owner-controlled”firms.Tufano(1998)argues that cash flow hedging can protect managers from capital market scrutiny,potentially exacerbating shareholder-manager conflicts.Taking a shareholder value maximization perspective,Morellec and Smith(2007) argue that hedging can control overinvestment incentives.Finally,Wei and Yermack(2011)find that market reactions to disclosures of significant inside debt positions of chief executive officers(CEOs) are consistent with a value-destroying reduction infirm risk and transfer of value from shareholders to bondholders.3While the wedge between external and internalfinancing costs could arise from a variety of capital market imperfections(FSS(1993)),it will arise even in frictionless markets that rationally incorporate the agency costs of inefficient investment(Jensen and Meckling(1976)).Kumar and Rabinovitch889 positively related to cashflow persistence because it is positively related to the (unconditional)cashflow volatility.Of course,the agency-based precautionary hedging motive will be comple-mentary to the other hedging imperatives,such as the alleviation offinancial dis-tress and borrowing costs or tax optimization,that have been discussed in the literature.Our empirical test design analyzes the determinants of the demand for hedging broadly using hand-collected detailed quarterly data on the hedging positions of independent exploration and production(E&P)firms that are un-diversified in terms of physical assets during1996–2008,which includes the 2006–2008period with extraordinary price volatility.Our data set is of special interest because most studies of the determinants of hedging use only information onfirms’decision to hedge or use derivatives,and in comparison with the few studies that use more detailed hedging information from commodity-producing industries,we have a relatively long time series.Indeed,we exploit the substan-tial variation in oil and natural gas price volatility during the sample period to examine the effects of high commodity price volatility regimes on risk manage-ment,an issue that has not been explored in the literature.4We base our measures of hedging intensity and CEO entrenchment on the risk management and corporatefinance literatures.Because of limited data avail-ability,most of the empirical literature uses only information on whetherfirms hedged but not the extent of hedging(Fenn et al.(1997)).Studies that examine the extent of hedging in commodity-producing industries typically use some mea-sure of hedging intensity,such as the fraction of production hedged(FPH)used by Haushalter(2000)or the delta of thefirms’derivatives portfolio used by Tufano (1996).For completeness and reliability of inference,we use both the FPH and the delta of thefirms’(oil and gas)derivative portfolio.For CEO entrenchment lev-els,we use proxies from the empirical literature on this topic(Berger,Ofek,and Yermack(1997),Hu and Kumar(2004),and Chava,Kumar,and Warga(2010)). We summarize our mainfindings below.Hedging intensity is positively related tofinancial leverage(as measured by thefirms’long-term debt)and to factors that enhance CEO entrenchment and free cashflow agency costs,such as long CEO tenure,high CEO stock ownership, and weak board governance because of a low proportion of independent direc-tors with interlocking relationships.The effects of leverage and the free cashflow agency cost factors on hedging intensity are both economically and statistically significant,and they are robust to different empirical specifications and econo-metric testing methodologies.Other things being heldfixed,raising long-term debt by1standard deviation increases the hedged amount by about5%of the production volume,while raising the proportion of independent directors on the board by10%reduces hedging by15%of the production,andfirms with new 4Unlike much of the literature,we use quarterly,rather than annual data,which is important be-cause hedging activities in the oil and gas industry have short horizons.For example,Haushalter (2000)examines data on the oil and gas industry for1992–1994;Tufano(1996)considers data from the gold mining industry for1992–1994;Mian(1996)examines a broader sample offirms for1992; and Carter,Rogers,and Simkins(2006)use data on hedging by airlines during1996–2000.Similarly, Guay and Kothari(2003)and Geczy,Minton,and Schrand(2007)also use data with relatively short sample periods.890Journal of Financial and Quantitative AnalysisCEOs hedge13%less of their production compared to afirm with the mean CEO tenure.Hedging intensity is also positively related to the unlevered beta(the proxy for intrinsic cashflow risk)and the marginal tax rate,but it is negatively related to free cashflows;these effects are also economically significant.And while cash flow persistence increases hedging,in accordance with the precautionary hedging motive hypothesis,this effect is not significant when we control for CEO en-trenchment and free cashflow agency costs.Furthermore,wefind evidence that, ceteris paribus,managers increase hedging in periods of higher price volatility. Finally,wefind that hedging has a significantly negative effect on the loan costs: Firms with the average FPH are charged an interest rate that is over14%lower than that of nonhedgers,translating to a reduction of loan costs by over27basis points(bp),based on the mean loan spread of192bp.To our knowledge,this is thefirst study to empirically document the signif-icant effects of managerial entrenchment on corporate risk management,specifi-cally CEO-and board of directors-(BOD)related characteristics associated with free cashflow agency costs.While previous empirical studies examine the effects of CEO equity ownership on risk management from the viewpoint of testing the effects of managerial risk aversion(Tufano(1996),Haushalter(2000)),we appear to be thefirst to analyze and document the role of long CEO tenure(especially the effects of a change in CEO)and governance and monitoring by the BOD.5In a related vein,the relationship between the availability and persistence of free cash flows on hedging does not appear to have been examined empirically in the liter-ature.Our results support the view that free cashflow agency costs and the level of CEO entrenchment play significant roles in the determination of corporate risk management policies.Furthermore,our analysis provides robust evidence that hedging is moti-vated by the reduction offinancial contracting costs(as indicated by the rela-tionship between hedging intensity and leverage and borrowing costs),which is consistent with a long-standing theoretical prediction on the positive relation-ship between debt and risk management in the literature(e.g.,Smith and Stulz (1985),Bessembinder(1991),and FSS(1993)).The effect of debt on hedging intensity is highly statistically significant(and economically meaningful)across a variety of econometric specifications and methodologies.And,while cashflow risk is theoretically a central determinant of hedging demand,previous empirical studies have been unable to document a significant relationship between theoret-ically derived direct measures of this risk(i.e.,the unlevered beta)and hedging. Furthermore,to our knowledge,the effects of the realized free cashflows and their persistence on hedging intensity have not been documented in the literature; these results are of general interest(beyond the free cashflow agency perspective) because they suggest that the dynamic properties of corporate free cashflows sig-nificantly affect the extent of risk management.5In the existing literature on hedging,a role for managerial equity ownership arises only because risk-averse managers with greater equity ownership are predicted to prefer more risk management (Stulz(1984),Smith and Stulz(1985),and Tufano(1996)).However,in our setting,CEO equity ownership also has entrenchment and power implications.Kumar and Rabinovitch891 In sum,we present a more comprehensive picture on the determinants of the extent of hedging than is available in the literature,and our results suggest that managers generally tailor risk management policies to minimize bankruptcy and externalfinancing costs and to exploit value-creation opportunities from tax optimization.Our analysis also indicates that,in addition to these motivations, entrenched managers subject to free cashflow agency costs also have a precau-tionary motive for hedging to ensure access to internally available liquid resources.The determinants of corporate risk management identified by our anal-ysis are,thus,consistent with the theoretical literatures on risk management and agency costs that have been among the most important components of corporate finance research in the last few decades.We organize the paper as follows:Section II presents our motivation and hypotheses,while Sections III and IV describe the data and the empirical test de-sign,respectively.Sections V and VI present the results,and Section VII concludes.II.Entrenchment,Free Cash Flows,and Hedging In this section,we review briefly some of the major theoretical motivations for hedging in the literature.6We then discuss the role of managerial entrenchment in the demand for hedging and develop hypotheses for our empirical analysis.A.Literature ReviewFinancial Distress and Bankruptcy Costs.Economic(or deadweight)costs offinancial distress and bankruptcy include administrative costs,loss of tax shields, and underexploitation of growth options(Warner(1977),FSS(1993)).By reduc-ing cashflow variability,hedging lowers the expected distress and bankruptcy costs,which can also lower thefirm’sfinancing costs(Smith and Stulz(1985), Mayers and Smith(1990)).In addition,Bessembinder(1991)shows that by re-ducing the probability of default,hedging may also alleviate the agency costs due to shareholder opportunism at the expense of creditors.Underinvestment Costs.If there are transaction costs in external funding because offinancial market imperfections and frictions(e.g.,Hoshi,Kashyap, and Scharfstein(1991)),thenfirms risk not having sufficient internal funds to finance growth opportunities;these costs can be substantial if growth options or opportunities are short-lived.Under these circumstances,FSS(1993)argue that hedging can add value by ensuring that thefirm does not underinvest in positive net present value(NPV)projects because of bindingfinancial constraints.Economies of Scale.There are significantfixed costs involved in setting up hedging operations internally.Typically,firms have to commit full-time em-ployees to develop,oversee,and monitor the hedging operations(Dolde(1993)).6We note that this is not an exhaustive survey of hedging motivations,since such surveys are available elsewhere(Fenn et al.(1997),Stulz(2003)).Rather,we highlight those motivations that we can empirically examine through our data(see Section III).892Journal of Financial and Quantitative AnalysisIn addition,hedging is generally not cost effective below a minimum threshold of hedging exposure due to the presence of quantity discounts in derivatives trading (Nance,Smith,and Smithson(1993)).Tax Incentives.The convexity of the corporate tax schedule(because of progressive corporate tax rates and the presence of tax shields)implies that hedg-ing increasesfirm value by reducing the volatility of the taxable income stream (Mayers and Smith(1982),Smith and Stulz(1985),and Graham and Rogers (2002)).In particular,iffirms do not reduce income volatility through hedg-ing,then the exploitation of tax shields may have to be postponed,reducing their present value(Mian(1996)).Managerial Risk Aversion.Managers are generally constrained for a number of reasons in diversifying away cashflow risk of the companies they control.For example,firm-specific human capital is not typically tradable,and managers are legally prohibited from shorting the stock of their own companies.Stulz(1984) and Smith and Stulz(1985)argue that managers’expected utility is concave in firm value,motivating them to hedge.Note that the presence of stock options may dilute this effect,since stock options by themselves imply that expected utility is convex infirm value.We summarize the effects of the motivations discussed above onfirms’hedg-ing intensity in the following hypothesis.Hypothesis1.Other things being heldfixed,the hedging intensity will be posi-tively related to i)default risk,ii)cashflow risk,iii)asset size,iv)the marginal corporate tax rate,and v)managerial risk aversion.B.Managerial Entrenchment and Hedging:HypothesesEntrenched managers of widely ownedfirms cannot be costlessly separated from control,allowing them the potentialflexibility of undertaking projects to enhance personal agendas(or utility)rather than shareholder value;that is,to indulge in“empire building”(Stulz(1988),(1990),Hart(1995)).7The invest-ment moral hazard from managerial entrenchment links the free cashflow agency problem(Jensen(1986),(1993))with the externalfinancing costs emphasized by FSS(1993).But while FSS conduct their analysis from the viewpoint of share-holder value maximization,we argue that the“empire-building”preferences of entrenched managers create a demand for hedging in addition to other motives for risk management.Tofix ideas,consider a publicfirm with separation of ownership and con-trol and suppose that there is a shareholder-manager agency conflict because the manager derives private benefits from controlling larger investments.Moreover, 7Typically,managers can be separated from control through successful proxy motions by share-holders(Fluck(1999)),takeovers(Shleifer and Vishny(1986)),and bankruptcy(Zwiebel(1996)). Entrenchment is thus possible if there are significant transaction costs in shareholder activism,the market for corporate control,and the bankruptcy process.Managers may also effectively entrench themselves by making manager-specific investments(Shleifer and Vishny(1989))and by strategically enhancing their voting rights(Stulz(1988)).Kumar and Rabinovitch893 thefirm also faces externalfinancing constraints.The managerial moral hazard for overinvestment naturally leads to a wedge between internal and externalfinancing costs becausefinancial markets incorporate the tendency toward inefficient invest-ment(Jensen and Meckling(1976),Stulz(1990)).Clearly,even highly entrenched CEOs cannot exploit their positions to undertake negative NPV projects in the ab-sence of substantial free cashflows or access to low-cost externalfinancing.But if there are transaction costs in externalfinancing,then ensuring reliable access to free cashflows is especially important for entrenched managers’ability to fund their empire-building initiatives.The intuition here is that,whatever may be the manager’s intrinsic attitudes toward risk,the presence of empire building and external cashflow constraints enhances risk aversion with respect to cashflow realizations.Moreover,this risk aversion increases with the private benefits from control or the entrenchment levels of managers.That is,the higher are the manager’s private benefits of con-trol,the greater is her expected marginal value from cashflows,and thus the higher is the risk aversion toward future investmentfinancing risk.8Consequently, we predict a positive relationship between the manager’s level of entrenchment and the optimal level of corporate hedging intensity.Hypothesis2.Hedging intensity is positively(negatively)related to factors that enhance(weaken)managerial entrenchment.We turn next to the relationship between free cashflows and hedging inten-sity.We start by observing that hedging is costly:There are direct or tangible transaction costs,and there are implicit costs of reducing the“upside”of higher profits from increasing commodity prices.A CEO who optimizes her expected utility subject to cashflow constraints will,therefore,reduce hedging ceteris paribus when the free cashflows at hand are higher(and conversely,when the cashflow realizations are low).Thus,we predict that:Hypothesis3.Hedging intensity is negatively related to available free cashflows.A useful intuition regarding Hypotheses3is that in the presence of external financing costs,there is a(free cashflow)agency-based precautionary motive for hedging for entrenched managers;that is,in addition to other motivations,such as alleviatingfinancial contracting costs,entrenched managers put a premium on accessing cashflows to preserve their ability to pursue their agendas,or their idiosyncratic preferences for investment.An increased availability of free cash flows therefore reduces the agency-based hedging demand because it is costly in terms of foregone profit opportunities.Therefore,factors that amplify the volatil-ity of free cashflows raise the optimal hedging intensity,other things being held fixed.Now,it is a stylized fact that operational cashflows are positively seri-ally correlated(e.g.,Griffin(1977)).We,thus,expect that the cashflow persis-tence will amplify the demand for hedging because it raises the(unconditional) 8These statements can be formally demonstrated by means of an analytical model that is available from the authors.894Journal of Financial and Quantitative Analysisvolatility of cashflows.Heuristically,consider the free cashflow process{C t}asa stationary AR(1)process,(1)C t=α+ρC t−1+εt,where−1<ρ<1is the persistence parameter and{εt}is white noise with mean0and varianceσ2ε.It is well known that the unconditional variance of the cashflows is Var(C t)=σ2ε/(1−ρ),which is clearly increasing in the persistence. We,therefore,positHypothesis4.Hedging intensity is positively related to the persistence of free cashflows.We note that Hypotheses3and4have significant implications for the empir-ical test design for examining the relationship between the demand for hedging and cashflows.Axiomatically,there should be a positive correlation between the current hedging intensity and future cashflows,other things being heldfixed. However,Hypothesis3implies a negative correlation between hedging intensity and recent cashflow realizations ceteris paribus,while Hypothesis4implies a positive relationship between hedging intensity and the persistence parameter of the cashflow process.It is noteworthy that the connection between cashflows and hedging inten-sity has been studied rather sparsely in the literature.Building on the assumption that externalfinancing is costlier than internally generated sources of capital,FSS (1993)predict theoretically that the demand for hedging increases with the cor-relation between thefirm’s cashflows and thefirm’s collateral values.9However, they do not consider the implications of free cashflow agency costs on hedg-ing by entrenched managers.Acharya,Almeida,and Campello(2007)consider the effects offinancial constraints on thefirm’s optimal choice between saving cash versus reducing debt(or saving debt capacity)and argue thatfirms with a negative correlation between cashflows and investment opportunities(i.e.,with high intrinsic hedging needs)will prefer saving cash over reducing debt and con-versely forfirms with low hedging needs.But the important insight developed above is that entrenchment and the free cashflow agency problem amplify man-agers’hedging needs for any given correlation between cashflows and investment opportunities;that is,firms with higher agency costs will ceteris paribus prefer to protect cash through greater hedging intensity.Finally,Acharya et al.do not consider the implications of persistence in cashflows for hedging.We now turn to the empirical analysis.We reiterate that the entrenchment and free cashflow agency-based precautionary motive for hedging that we develop in this section is in addition to other motives for hedging examined in the literature and discussed in the previous section.Our empirical tests,therefore,examine the effects of entrenchment-related variables and free cashflows on hedging intensity, while controlling for the factors associated with the other hedging motives.In the next section,we describe the data.In the succeeding sections,we describe the empirical test design and present the results.9Thefirm’s demand for hedging decreases,however,the higher the correlation is between the firm’s cashflow and thefirm’s future investment opportunities.Kumar and Rabinovitch895 III.DataWe use a hand-collected data set from the oil and gas E&P industry for our empirical analysis.A.The Oil and Gas IndustryCommodity-producing industries with significant volatility of the underlying commodity price are natural candidates for studying the determinants of hedging intensity.The oil and gas industry is an excellent example because crude oil and natural gas prices are highly volatile.Thus,understanding the determinants of hedging in this industry is an important endeavor.Independent oil and gas E&Pfirms explore and produce crude oil and natural gas and sell it on an“as is”basis at the wellhead.They sell their output as it is ex-tracted from the reservoir with no other downstream services so that their earnings are directly governed by the commodity prices.Hence,their profitability,perfor-mance,and default probabilities are very sensitive to oil and gas price volatility. In contrast to the E&Pfirms,integrated companies encompass many layers of the industry value chain.Consequently,their profitability is not as closely tied to commodity pricefluctuations as is the case with E&Pfirms.In addition,inte-gratedfirms are involved in both upstream and downstream businesses,and they are often naturally hedged,while E&P companies are not.10Moreover,by its very nature,the E&P business is highly capital intensive.Positive NPV investment op-portunities are lumpy and arise sometimes unexpectedly and,therefore,capital shortfalls in these periods can have long-term costs.Growth opportunities for in-tegrated companies,on the other hand,arise from many different and relatively uncorrelated sources,and thesefirms,being larger,have better access to capital and money markets than the E&Pfirms do.For all these reasons,the independent E&Pfirms have a greater intrinsic demand for hedging compared to the integrated firms.B.Sample ConstructionComplete hedging data are not available prior to1996and,hence,our sample selection begins with all the E&Pfirms given in Hoovers Online(www.hoovers .com)as of Jan.1996.Hedging activities in the oil and gas industry have a rela-tively short horizon;we therefore obtain data on derivative positions on a quarterly basis,the smallest interval for which data are publicly available.We obtain the data onfirm-specific characteristics from Compustat,ExecuComp,Center for Research in Security Prices(CRSP),and Capital IQ.The data onfirms’hedged positions are hand-collected from10-K and10-Q formsfiled by listed companies with the Securities and Exchange Commission(SEC).We requirefirms to be represented on Compustat and to have at least 10years of hedging data.We eliminatefirms that went out of business,were 10For example,the price of crude oil,which is an input in the refining process,is highly positively correlated with the prices of cracked products,such as heating oil and unleaded gasoline.。