Download The impact of Agency Problem in Firm value and the Greek Stock

International Conference on Applied Economics – ICOAE 2008
27
The impact of Agency Problem in Firm value and the Greek Stock Exchange Market
Financial Crisis.
Antoniadis I.1, Lazarides T.2, Sarrianidis N.3, Goupa H.4
Abstract
According to agency theory, separation of ownership and control should lead to reduced firm value due to expropriation of the shareholders and especially
minority shareholders from big shareholders and managers. Corporate governance provides with the means to address the problem. The role of ownership
structure as corporate governance mechanisms during the financial crisis of 1999-2001 is examined. We find that value firms where separation of
ownership and control is present, decreases when levels of ownership concentration are high. Interestingly separation of ownership and control does not
seem to cause significant agency problems in firms. Although results concerning ownership are no statistically significant in all cases, high levels
ownership concentration to one shareholder leads to reduced firm value probably due to expropriation of minority shareholders from big controlling
shareholders.
Key Words: corporate governance, agency theory, Greece
JEL codes: G30, G38, O16
1. Introduction
Corporate governance has been a central issue for researchers and regulators across the world during the last years. The most
celebrated and used theoretical framework for examining the conflicts that arise during the operation process of a firm and the
management decision process is agency theory.
Corporate Governance mechanisms are held responsible for establishing a sound and strong framework for protecting investors and
therefore for helping the development of financial markets. Demsetz and Lehn (1985) identified ownership structure as an important
factor that affects firm valuation and performance. Shleifer and Vishny (1997) also point out the importance of ownership concentration
as a mechanism of reducing agency cost, and along with the legal framework that protects investors, are identified as one of the most
important determinants of a corporate governance system.
Recent literature demonstrated the importance of strong corporate governance mechanisms in both preventing, and ameliorating the
effects and losses incurred by corporations during periods of financial crisis especially in emerging markets [La Porta et al, 1999,2002].
Weak CG framework was held accountable for the heavy losses that investors and firms suffered in East Asia during the financial crisis
of 1997 to 1998 [Johnson et al. 2000, Mitton 2002].
Despite the fact that the East Asia financial crisis was caused by different reasons, a similar situation occurred in the Athens Stock
Exchange Market (ASE) the following years (2000-2001). After two years of continuous increase (1998-1999) that was characterized by
a very big number of IPOs and a disproportional increase in both the volume of transactions and the ASE index value as a result of an
extended public euphoria, the market became bearish causing severe losses for both firms and small private investors. Although not
visible at the time the absence of sound Corporate Governance framework and mechanisms made the crisis worse.
Notwithstanding the graveness of the crisis crucial parameters of corporate governance that lead to poor investor protection, and their
role in the crisis have not been yet examined. Some of them that could be blamed for the severity of the crisis are asymmetric
information concerning the financial status of the firms, poor mechanisms of information disclosure and heavy ownership concentration
that resulted to expropriation of minority shareholders, as agency theory implies.
The purpose of this paper is to examine the nature of the agency problem that lead to the crisis. More specifically ownership
concentration is examined as a mechanism of corporate governance in reducing agency costs and increasing shareholder protection. The
hypothesis examined is twofold. Firstly the nature of the agency problem that Greek listed firms faced is examined. Was it the classical
conflict of interests caused by the separation of ownership and control as Bearle and Means identified in 1932, or the expropriation of
minority shareholders from big controlling shareholders? And second what was the impact of ownership structure in firm value during
the crisis.
The results derived are in line with the findings of relevant literature. The main agency problem that Greek listed firms faced seems
to be the conflict of interests between minority and majority shareholders. High levels of ownership concentration in one big shareholder
had a negative effect in firm value, no matter whether he held the management or not. Non linear relation between ownership and firm
value was statistically significant only in firms where owner was not the manager, suggesting management entrenchment, and
expropriation of minority shareholders. Results concerning firms with big shareholder who has the majority of shares also indicate the
same conclusions. The lack of a corporate governance framework worsened the effect of the crisis especially for the small shareholders.
The rest of this paper is organized as follows. Section 2 discusses the agency problem, the CG mechanisms, and the ownership
structure of firms in Greece during the period 1999-2001. Section 3 describes the data and methodology used in the study. Section 4
reports the results and finally section 5 concludes the paper and offers some critique on the legal framework that was established after the
crisis.
2. Corporate Governance in Greece
2.1. Agency problem and ownership structure during financial crisis.
Corporate governance is the means by which minority shareholders are protected from expropriation by managers or controlling
shareholders, or as Shleifer and Vishny (1997) state, CG is the way in which the suppliers of finance to corporation assure adequate
returns on their investments. These views are predominant in the anglo-saxon corporate systems that are characterised by dispersed
ownership and increased development of financial markets.
1
Agricultural Bank of Greece
Department of Information Technology Applications in Administration and Economy (Technological Institute of West Macedonia, Grevena, Greece)
Department of Financial Applications (Technological Institute of West Macedonia, Kozani, Greece)
4
Department of Accounting (Technological Institute of West Macedonia, Kozani, Greece)
2
3
28
A
A
m
2
International Conference on Applied Economics - ICOAE 2008
Accordingg to Hart (19955), a main reasoon for developiing a system of corporate govvernance mechhanisms is the presence
p
of ageency
problem. Ageency problem arises
a
because of
o the conflict of
o interests bettween, the princcipals who ownn an asset and the
t agents whoo are
responsible for managing thiss asset on behaalf of its ownerss (principals). Traditional
T
view
w of agency theory, as posed by
b Berle and Meeans
he separation off ownership andd control.
in their seminaal work in 19322, and Fama andd Jensen (1977)) is therefore th
Ownershipp structure is ann important facttor in determining firm value [Demsetz and Lehn,
L
1985]. Laarge blockholdeers should havee the
incentives to closely
c
monitorr the top management of the firm and to deter them from engaging in invvestments and actions that woould
decrease firm value. In that sense ownershhip concentratioon serves as a corporate
c
governance mechannism that reducces the agency cost
incurred to thee firm by separaation of ownersship and controll.
However in Greece as most
m
of the firm
ms are family owned,
o
it would
d be wise to question the role of separation
n of ownership and
c
of agenncy problem. The
T conflicts of interests betweeen minority annd majority sharreholders should be
control as the reason for the creation
more appropriiate for addresssing the agencyy problem that Greek firm facce [Spanos, 20005]. That kind oof agency prob
blem leads to loower
firm value esppecially in counntries with legaal environment that does not offer
o
adequate legal
l
protectionn for sharehold
ders [La Porta et
e al.
2002]. The Grreek legal and corporate
c
enviroonment was chharacterized by its below averaage protection llevel for shareh
holders [La Portta et
al. 1999], and for the underdeevelopment of corporate
c
goverrnance mechaniisms and instituutions [Mertzannis 2001] at the period of the crisis
that occurred (1999-2001). This
T situation caan be more dam
maging for firm
ms during the peeriod of a crisiss as literature findings
fi
suggestt for
m have not beeen responsible for the crisis but
b it
the East Asia financial crisis,, where the absence of corporaate governance mechanisms may
magnified its effect
e
in firms around
a
the areaa. Empirical results suggest thaat change in firm
m value during a crisis is a fun
nction of firm-llevel
differences in corporate goveernance measurres and that ownnership structurre play a signifficant role in deetermining the firm
f
value durinng a
financial crisiss [Baek, Kang and
a Park, 2004]].
Controllinng shareholders have the incenntives to exproppriate minority shareholders
s
ass return on investment of the firm
fi falls duringg the
crisis, and minnority shareholdders who are ussually small privvate investors do
d not have eithher the means orr the incentivess to closely monnitor
and safeguardd the performannce of their inveestment. Johnsoon et al (2000) provided empirical result thaat supports this view for five East
E
Asian econom
mies. Moreover in periods wheere the market is bullish, few
w are concernedd about the lackk of corporate governance.
g
Buut in
period of crisiis investors are more concerneed about corporrate governancee in firms and itt is more possibble to get out from
fr
a firm thatt has
weak corporatte governance in place. It is more possible therefore for firms
f
with agenncy problem duue to ownershiip structure to face
bigger losses during
d
a financiial crisis.
Relevant research
r
for East
E
Asia crisiss supports this view. Empiriccal results show
w that firms w
with big contro
olling sharehollders
outperform firrms with dispersed ownership or firms with big concentrated
d ownership. Joh (2003) finds tthat during the 1993–1997 perriod,
Korean firms whose
w
controlliing family shareholders had more
m
ownership outperformed those
t
where thee family membeers had less. Miitton
(2002) also shhows that higheer block ownersship by the larggest shareholderr is associated with
w higher crissis-period stock
k returns especiially
if they are noot involved withh the managem
ment of the firm
m. The same reesult occurred for
f firms with higher disclosu
ure quality, greeater
transparency, higher
h
outside ownership
o
conccentration.
In contrastt to those results Lemmon andd Lins (2001) show
s
that durin
ng the crisis, firrms in which coontrolling owneer-managers ow
wned
more of the coontrol rights, buut fewer cash flow
f
rights, sufffered more losss of share valuees. Finally Baekk, Kang and Paark (2004) find that
firms with conncentrated owneership by owner-managers expperience larger losses
l
in firm value.
v
2.2. The Grreek Stock Market
M
durin
ng the crisis
s.
Greek stocck market has been
b
underdeveeloped for mostt of the 1990’s decade. Howevver in 1998 theere was a huge interest from sm
mall
private investoors that lead to an extended inncrease in bothh the value of th
he ASE index, and the volum
me of transaction
ns. The ASE inndex
almost tripled its value from the levels of 1,500 in Februaryy 1998, to an alll time peak of 5,500 in Decem
mber 1999 (Graaph 1). This process
was a result off both speculatiive investmentss and self fulfillled expectationss that were not based in the funndamental dataa of both the maarket
and the firms listed to it. Thiis bullish periodd of the markett lasted from 19
998 until the ennd of 1999, whhere the market turned downw
wards
ficant losses to investors
i
and more
m
specificallyy -38% during 2000,
2
and -24%
% in 2001.
causing signifi
Graph 1. Thee Athens Stock
k Exchange ind
dex during the crisis.
The Greekk stock markett also realized a significant increase in thee number of liisted firms, maarket capitalizaation, and valuee of
transactions. The
T numbers off firms listed inn the market were
w
237 in 199
97, and throughh IPOs and thee introduction of
o new firms inn the
market 349 firrms were listedd in the end of 2001.
2
Market capitalization
c
reeached 67,024.778 million euroos in 1998 and 197,536.97 milllion
euros in 1999 achieving an inncrease of 132..87% and 194.772% compared to 1997 and 19998 respectivelyy. Transactionss volume realized a
similar increasse reaching 41..331,15 millionn euros in 1998 and 172.865,8
88 million euross in 1999 achieeving an 318% increase. The next
n
years howeverr, when the crissis begun, markket capitalizationn dropped by -4
40% in 2000, annd -18% in 20001, while transaactions value felll by
-41% in 2000,, and -58% in 2001.
International Conference on Applied Economics – ICOAE 2008
Table 1. The Greek Capital Market (values in million euros)
Market capitalization
Number of listed
Year
companies
Value of shares
% change
1995
215
11.814,82
1996
235
17.446,17
47,66
1997
237
28.782,47
64,98
1998
258
67.024,78
132,87
1999
294
197.536,97
194,72
2000
342
117.666,18
-40,43
2001
349
96.938,49
-17,62
Source: ASE, Hellenic Capital Market Committee
29
Transactions Volume
Value of total
transactions
% change
4.130,74
5.840,08
41,38
17.027,24
191,56
41.331,15
142,74
172.865,88
318,25
101.423,15
-41,33
42.345,16
-58,25
Firms were not unaffected by this crisis. Anticipating the opportunities of acquiring cheap capital for future investments, 117 firms
had raised 5.823,27 million euros during the period of 1998-2001. The most active year as far as IPOs and Pos is concerned was 2000
when a total of 3,84 billion euros was raised by the market. The allocation of these funds in new projects and investments by the firms is
also an issue as small shareholders could not evaluate the actions of the firm’s management as far as capital investments as a means of
increasing the firm value was concerned.
Table 2 Funds raised by firms from ASE during 1999-2001 (values in million euros)
Public Offers
Initial Public Offers
Funds raised (Total)
Number of
Value of
Number of
Value of
Number of
Value of
Year
firms
Raised Funds
firms
Raised funds
firms
raised funds
1999
15
1.153,36
6
136,44
21
1.289,79
2000
44
2.837,28
25
1.010,48
69
3.847,76
2001
8
225,02
17
460,69
25
685,71
Total
67
4.215,66
48
1.607,60
115
5.823,27
Source: ASE, Hellenic Capital Market Committee
The crisis had a significant effect in both Greek economy and society as well. A number of firms were led out of the stock market,
while other faced severe losses due to investments that they made anticipating a further development of the stock market. The public has
lost its trust in the Stock Market as a viable and alternative way of investment, and that has deprived small firms, from access to the
capital market.
2.3. The legal framework for CG during the crisis and afterwards
As literature reports the level of investor protection has been low during the period of 1995-2000 [Mertzanis. 2001]. La Porta et al.
(1999) categorized Greece in the French origin law system, scoring below the average scores of the total sample of countries examined in
terms of investor protection.
In 1999 an attempt by the Hellenic Capital Market Commission (HCMC) was made to introduce voluntarily a Corporate Governance
framework that was mainly based on the OECD principles. However widely accredited corporate governance mechanisms such as BOD
committees – independent members, information disclosure, were not used as ways for minimizing agency cost and promoting
transparency by Greek listed firms.
As the social impact of the crisis begun to be more obvious, voices calling for the need of establishing specific rules of conduct and
legal framework for corporate governance that would provide protection to small and minority shareholders, became stronger. The
3016/2002 law was imposed to help establish transparency and protection of shareholders and to regain the lost trust of the public in the
stock market its firms’ and its institutions.
Despite the fact that the new regulatory framework intended on the establishment of a relationship framework within the listed firms,
only a few companies have applied the provisions of the new law in the years to come [Spanos. 2005]. The firms who were displayed
genuine interest in corporate governance were mainly the big capitalization firms where institutional and foreign shareholders had
significant presence.
3. Data and Methodology
The sample of firms examined includes the FTSE-140 firms for the period 1998-2001. All financial firms were excluded from our
sample. As unbalanced panel data methods are used the number of observations for each year is different reaching a maximum of 112 in
the year 2001. The data came mainly from the ASE and from each firm’s annual report. In order to test the hypothesis concerning the
agency problem that the Greek firms faced two cases are examined. In the first case the sample is divided in two subsamples, namely
firms where separation of ownership and control is present and to firms where it is not. A performance regression then is estimated with
the use of unbalanced panel data:
Performanceit = β0 + β1(ownership)it + β2(control variables) it + uit ,
(1)
where i stands for the firm and t= 1998-2001 and uit represents the disturbance term
In the second case firms are split to those that the larger shareholder has more than 50,1% of the total shares and to those that has less
than 50,1%. The percentage of 50,1% gives the block holder the right to exercise full control over the company in both the Board of
directors and the general shareholder meeting. Again a performance regression is estimated for both samples :
Performanceit = β0 + β1(ownership)it + β2(management variables) it + β3 (control variables)+ uit ,
(2)
where i stands for the firm and t= 1998-2001 and uit represents the disturbance term
The variables used in the regression fall into four categories, performance, ownership, control variables and management variables.
Performance is measured with the Tobin’s Q is used as a proxy for firm value [Agrawal and Knoeber, 1996] and is the ratio of the sum
of capitalization and total liabilities of the firm to the value of the total assets. The ownership variable examined is the bigger
shareholder ownership (OWN) that accounts for the biggest owner who holds more than 5% of the company. The square of this variable
30
International Conference on Applied Economics – ICOAE 2008
(OWN2) is included to capture any nonlinear relationship between performance and ownership according to relevant literature [Morck et
al 1989].
Management characteristics of the firm are described by two variables. A dummy variable is used in order to measure separation of
ownership and control (OWNCEO) that equals 1 if the bigger shareholder is a the CEO, and zero if otherwise. If the CEO of a firm is
not the large blockholder or a first degree relative, then it is assumed that there is separation of ownership and control. The separation of
roles between CEO and the chairman of the board (CEOCHAIR) is also examined as an indication of management concentration, with a
dummy variable that takes the value of 1 if the CEO is also the chairman of the board and 0 otherwise.
In order to examine firm specific characteristics a number of control variables are also introduced. Size of the firm is measured as
the natural logarithm of the total assets of the firm. Debt (D/E) is calculated by dividing total liabilities to total equity. Capital intensity
(K/S) is measured as the ratio of capital expenditures over sales, and the square of this variable (K/S2) is used to capture nonlinearities
that may arise. The natural logarithm of the age (AGELOG) of the firm is used to examine the effect of business cycle of the company.
Finally volatility of the common share prices (VOL) of firms is included to the regression.
Table 3 : List of Variables used.
Variable
Definition
Q
Tobin’s Q proxy for the firm value of the firm
OWN
Ownership % of the main blockholder
OWN2
Ownership % of the main blockholder squared
SIZE
Natural logarithm of the Total Assets of the firm.
D/E
Debt to Equity ratio
K/S
Capital Intensity (Capital/Sales)
(K/S)2
Capital intensity squared
VOL
Stock volatility
AGE
The natural logarithm of the age of the firm
OWNCEO
Separation of ownership and control dummy variable
CEOCHAIR
Separation of roles in the board of directors variable
Both ownership and financial data has been provided by the Athens Stock Exchange Market (www.ase.gr), while the separation of
ownership and control variable was taken by the annual reports of the firms examined. Table 3 gives an overview of the above variables
The descriptive statistics of the used variables and t-statistics for the equality of means for the family and non family firms are given
in Table 2 (case listwise). T- test for means equality in the case of separation of ownership and control show that the two groups have
significant differences of means for ownership variables. As results of panel A shows that firms where big shareholders do not hold the
management seem to have bigger shareholders than the firms where separation of ownership and control is present.
Table 4: Summary Statistics
Panel A
Separation of ownership and control
Total sample
OWNCEO=1
OWNCEO=0
t-test of
(n. obs =336)
(n. obs =158)
(n. obs =178)
equality of
means
Mean
Std Dev
Mean
Std Dev
Mean
Std Dev
Q
3.74
4.37
3.63
3.93
3.85
4.78
0.604
OWN
0.46
0.21
0.52
0.20
0.40
0.20
-5.253 *
0.25
0.19
0.31
0.20
0.20
0.17
-5.402 *
OWN2
SIZE
18.63
1.19
18.34
0.97
18.92
1.26
5.052 *
D/E
0.73
0.77
0.65
0.69
0.78
0.77
1.750 ***
K/S
8.21
75.80
3.99
14.00
12.15
104.07
1.013
AGELOG
3.09
0.70
3.14
0.51
3.03
0.82
1.016
VOL
0.60
0.32
0.63
0.40
0.57
0.22
-1.400
Panel B
Majority controlled firms
Total Sample
OWN>50,1%
OWN<50,1%
t-test of
(n. obs =336)
(n. obs =155)
(n. obs =181)
equality of
means
Mean
Std Dev
Mean
Std Dev
Mean
Std Dev
Q
3.75
4.39
3.85
4.34
3.66
4.45
0.322
OWN
0.46
0.21
0.64
0.10
0.30
0.13
26.060 *
OWNSQ
0.25
0.19
0.42
0.14
0.11
0.07
26.382 *
SIZE
18.65
1.17
18.50
1.10
18.78
1.22
-2.263 **
D/E
0.72
0.74
0.70
0.75
0.74
0.73
-0.493
K/S
8.32
76.36
11.13
108.39
5.90
28.09
0.607
AGELOG
3.08
0.70
3.05
0.69
3.10
0.70
1.005
VOL
0.60
0.32
0.60
0.40
0.60
0.22
-0.135
OWNCEO
0.47
0.50
0.61
0.49
0.35
0.48
5.028 *
CEOCHAIR
0.43
0.50
0.47
0.50
0.39
0.49
1.732 ***
* P-value <0.01, ** P-value <0.05 , *** P-value <0.10
In panel B firms that are controlled by shareholders who hold the majority of shares, face more concentrated management as the
bigger shareholders is also the manager more frequently compared to firms that the bigger shareholder own less than 50,1% of the firm’s
shares. It is also notable that power concnentration in these companies is more intense as not only the bigger shareholder owns more than
50,1%, and is also the manager (OWNCEO) but he or she is usually the chairman of the board (CEOCHAIR) as well. The opposite
happens in firms where the bigger shareholder owns less than 50,1% where the means value for the variables are 0.35 and 0.39
International Conference on Applied Economics – ICOAE 2008
31
respectively compared to 0.61 and 0.47. It should also be noted that t-test does not report differences between the two groups of firms in
both panel as far as firm value (Tobin’s Q) is concerned.
Pearson’s Correlation matrix in Table 5, shows that there is not a significant multicollinearity problem except for the two cases where
the square of the variables concerning ownership (OWN2) and capital intensity squared, in both groups of variables that are examined.As
far as heteroscedasticity is concerned, heteroscedastic consistent standard errors were computed during the estimation of the equation.
Additionally appropriate F-tests and Hausman tests are performed and reported to choose between the fixed and random effects model
(Greene, 2000), when panel data method is used (Tables 6 and 7).
Table 5: Pearson’s Correlation matrix
Panel A
Separation of ownership and control
Number of Observations: 342
SIZ
Q
OWN
OWNSQ
E
1,00
Q
0,04
1,00
OWN
0,02
0,97
1,00
OWN2
0,37
-0,16
-0,17 1,00
SIZE
0,01
0,05
0,09 0,06
D/E
0,04
0,00
0,00 0,00
K/S
0,03
0,03
0,02 0,00
(K/S)2
0,14
-0,15
-0,14 0,17
AGELOG
0,37
0,06
0,08 0,29
VOL
Panel B
Number of obs
Q
OWN
OWN2
SIZE
D/E
K/S
(K/S)2
AGELOG
VOL
OWNCEO
CEOCHAI
R
Majority controlled firms
337,0
0
OWNS
Q
OWN
Q
1,00
0,04
1,00
0,03
0,97
1,00
-0,38
-0,15
-0,15
0,01
0,04
0,08
-0,04
0,00
0,00
-0,03
0,03
0,02
-0,14
-0,16
-0,14
0,38
0,06
0,08
-0,02
0,27
0,28
0,05
0,18
0,18
D/E
K/S
K/S2
VO
L
1,00
-0,08
1,00
-0,06
0,97
-0,09
0,03
0,01
-0,01
DE
K/S
K/S2
1,00
0,06
0,00
0,00
0,19
-0,29
-0,25
1,00
-0,08
-0,06
-0,09
0,01
-0,09
1,00
0,97
0,03
-0,01
-0,05
1,00
0,01
-0,02
-0,05
-0,15
0,11
-0,06
-0,05
SIZE
AGELO
G
1,00
0,01
1,00
-0,02
-0,10
AGELO
G
1,00
VO
L
OWNCE
O
1,00
-0,11
0,08
1,00
0,08
1,00
-0,10
0,05
0,28
CEOCHAI
R
1,00
4. Empirical Results
In tables 6 and 7 the empirical results are presented. In both tables the estimates of three regressions are offered, The estimates for the
total sample, and for the two subgroups of firms examined. Table 5 reports the results in the case where the biggest shareholder is also
the manger and in the case where separation of ownership and control is present. Table 6 focuses on the hypothesis concerning majority
controlled firms. Fixed effects model is preferred in both cases as F value is significant in a level of probability less than 1% in all cases.
Despite the fact that Hausman test also rejected random effets model the results reported by both models are similar.
Adjusted R squared for all three regressions of table 6 is high, especially for firms where the owner is not the CEO at the same time
reaching almost 79.76%. The most notable result however is that the square value of the ownership variable is statistically significant in
the 10% level. A nonlinear relationship between big shareholder ownership and firm value is present. Increase of ownership of the bigger
shareholder, while be beneficiary for firm value at lower levels of ownership, but eventually leads to losses in firm value. This result can
be attributed to management entrenchment and expropriation of minority shareholders by both managers and big shareholders,
explaining the nature of agency problem faced by Greek firms, and the efficiency of ownership structure as a mechanism of reducing
agency cost.
The same conclusions can be drawn for the case where the bigger shareholder holds the management. The relationship between
ownership percentage and firm value is negative and as ownership increases firm value falls giving an indication that big shareholders
had the incentive to expropriate minority shareholders leading to reduced firm value. However the hypothesis of nonlinearity of this
relationship [Morck et al. 1989] is not supported, and the results are not statistical significant, for both the ownership variable and its
squared value.
32
International Conference on Applied Economics – ICOAE 2008
Table 6 Separation of ownership and Control regressions
Firms with Separation of
Total sample
ownership and control
OWNCEO =0
OWN
22.824
30.574
(1.221)
(1.464)
OWN2
-33.111
-30.651
(-1.482)
(-1.689)***
SIZE
-2.252
-3.048
(-3.595)*
(-4.275)*
D/E
-0.614
0.157
(-1.970)**
(0.320)
0.014
K/S
1.55 ·10-3
(0.189)
(6.938)*
-9.75·10-6
-2.75·10-5
(K/S)2
(-1.545)
(-12.393)*
AGELOG
-9.086
-1.299
(-2.621)*
(-0.612)
VOL
5.025
9.273
(2.282)**
(4.127)*
number of obs.
342
178
Adjusted R-squared
40.93%
79.76%
Durbin-Watson
2.121
1.823
F(111,222) = 2.005
F(64,105) = 7.092
F-test
[.0000]
[.0000]
* P-value <0.01, ** P-value <0.05 , *** P-value <0.10
Firms with no Separation of
ownership and control
OWNCEO=1
-12.681
(-1.088)
0.086
(0.008)
-0.355
(-0.366)
-0.304
(-0.691)
-0.125
(-1.550)
7.43·10-4
(1.514)
-24.310
(-3.953)*
2.943
(1.683)***
159
39.71%
1.963
F(54,96) = 1.751
[.0084]
Results are similar when the firms are examined in groups based on the ownership percentage that the bigger shareholder has in the
firm. In firms where there is no shareholder with the absolute majority on firms’ shares (OWN<50,1%) ownership does not seem to have
a statistically significant effect on firm value. On the other hand for firms with big shareholders who have more than 50,1% of shares,
firm value is affected in a negative fashion by concentrated management and there is some evidence of a nonlinear relationship between
ownership and performance. Usually in these firms the bigger shareholders is both the CEO and the Chairman of the board, increasing
the chances of expropriation of minority shareholders, and consequently leading to lower levels of performance and firm value. Overall
the results also show the existence of agency problem in this case as well, as firm value decreases when the ownership percentage of the
bigger shareholders increases above a certain level of ownership.
Table 7. Majority Controlled firms regressions
Total Sample
OWN
9.142
(0.727)
OWN2
-14.390
(-1.299)
SIZE
-2.089
(-3.078)**
D/E
-0.597
(-1.511)
K/S
7.75·10-3
(0.954)
(K/S)2
-2.51·10-5
(-3.906)*
AGELOG
-9.949
(-2.867)*
VOL
4.485
(2.121)**
OWNCEO
0.538
(0.478)
CEOCHAIR
0.118
(0.309)
number of obs.
337
Adjusted R-squared =
60.36%
Durbin-Watson =
1.885
F(111,215) = 3.798
F-test
[.0000]
* P-value <0.01, ** P-value <0.05 , *** P-value <0.10
Firms not controlled by
absolute majority
(OWN<50,1%)
14.104
(0.556)
-22.843
(-0.572)
-3.028
(-2.709)*
0.258
(0.336)
-0.028
(-1.913)
8.32·10-5
(2.309)**
0.200
(0.035)
11.887
(3.522)*
-0.797
(-0.649)
1.464
(1.143)
181
60.53%
1.877
F(64,106) = 2.533
[.0000]
Majority
Controlled Firms
(OWN>50,1%)
-88.638
(-1.493)
61.095
(1.352)
-0.824
(-0.732)
0.035
(0.068)
-0.002
(-0.422)
-2.00·10-5
(-3.740)*
-11.403
(-2.335)**
2.187
(1.794)***
3.051
(0.972)
-0.942
(-1.812)***
156
71.69%
2.030
F(61,84) = 5.669
[.0000]
Despite the fact that ownership concentration is supposed to tackle with agency problem that cannot be proved for Greek firms
during this period, as results are not statistically significant. However there is some evidence that there has been expropriation of
minority shareholders by both managers and controlling shareholders. Big shareholders had the means and the resources to expropriate
International Conference on Applied Economics – ICOAE 2008
33
minority shareholders by possibly diverting resources for their own benefit, since return on their investment during the crisis period fell
dramatically.
These results are in line with the findings of Baek, Kang and Park (2004) and Lemons and Linns (2001) who also found that firms
with controlling shareholders who are also the managers face larger losses in firm value during a crisis period.
5. Conclusions
In this paper the context of agency problem in the Greek Stock market during a period of the financial crisis (1999-2001) was
examined. Unlike traditional agency theory implied agency problem was not a matter of separation of ownership and control, but a
matter of conflict of interests between majority and minority shareholders. High levels of ownership in one shareholder resulted in
reduced firm values, regardless of whether he held the management or not.
Ownership structure alone as a mechanism of reducing agency cost, could not tackle the agency problem by its own. Low levels of
legal protection for minority shareholders and lack of other corporate governance mechanisms such as independent board members,
standards of disclosure of financial data, and transparency, may have not been responsible for the crisis, but they could have decreased
the impact that it had both in firms and investors. The crisis forced both the public and regulators to anticipate the need of corporate
governance and lead to the law 3016/2002 for Corporate Governance.
The lack of Corporate Governance played a significant role in the crisis. Stronger corporate governance would have prevented a
crisis like this one as it would reduce the risk of expropriation of minority shareholders, and would encourage them to become more
conscious about the stock market and the firms that they invest in. Further research should shed light in other corporate governance
mechanisms and the impact they have in firm performance and value during crisis, but most of all if they are sufficient in protecting and
providing reasonable and useful information to small shareholders, especially in the Greek Stock market, and in transition economies.
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