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Session IV-1 Corporate Governance (17/12/2009 à 16h30)

C. Casamatta

Family Ownership, Multiple Blockholders and Firm Performance

Auteurs : Dušan Isakov (University of Fribourg); Jean-Philippe Weisskopf (University of Fribourg)

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Intervenants : Dušan Isakov

Rapporteurs : Gaël Imad’Eddine

Recent research has documented that family-controlled firms are very common around the world. This paper provides new evidence on the accounting and market performance of this type of companies. The empirical investigation is conducted on a market in which family firms are well-established and represent the most widespread form of ownership, namely Switzerland. Using panel data for the period 2003 to 2007 on companies listed on the Swiss exchange, we find evidence that family firms have a 1.19 higher Tobin’s Q and a 3% higher return on assets than non-family firms. A finer analysis reveals that the outperformance depends on the characteristics of the family business. First, we find evidence that family firms in which a second blockholder is present are even more profitable with a 5% higher return on assets and a 1.27 higher Tobin’s Q than non-family firms. In this case not only agency costs between management and shareholders are reduced but also between majority and minority shareholders by limiting private benefit extraction. Second, family firms in which a family is only an investor do not perform better than non-family firms. Only if family members are actively involved in management, as either CEO, Chairman or both do they add value and thus perform significantly better than outsiders. This indicates that family members have superior knowledge on their companies that is lost when they solely hold a financial participation in the firm. Finally, our results also show that these skills are not confined to the founder but are also present in heir-managed family firms. In particular we find that firms with descendant-CEO or founders acting as Chairman have better accounting and market performances.

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The Value of Independent Directors: Evidence from Sudden Deaths

Auteurs : Bang Dang Nguyen (Chinese University of Hong Kong); Kasper Meisner Nielsen (Chinese University of Hong Kong and CEBR)

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Intervenants : Kasper Meisner Nielsen (Chinese University of Hong Kong and CEBR)

Rapporteurs : Moqi Xu

We investigate the contributions of independent directors to shareholder value by examining the stock price reaction to sudden deaths in the United States from 1994 to 2007. We have four key findings. First, following the death of an independent director, the firm’s stock price drops by almost 1 percent on average. Second, the degree of independence and the power structure of the board determine the marginal value of independent directors. Third, independence is more valuable in crucial board functions, such as the audit committee. Finally, controlling for director-invariant heterogeneity using a fixed-effects approach, we identify the value of independence over and above the value of individual skills and competences. Overall, our results suggest that independent directors provide a valuable service to shareholders.

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CEO Employment Contract Horizon and Myopic Behaviour

Auteurs : Moqi Xu (INSEAD)

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Intervenants : Moqi Xu (INSEAD)

Rapporteurs : Catherine Casamatta

This paper studies the effects of horizon in CEO employment contracts on CEO performance. It uses the terms of 1,018 employment contracts to determine the employment time horizon of U.S. CEOs. Firms with shorter CEO contracts trade at a discount to firms with longer contracts. An investment strategy that bought firms with the longest remaining contract horizon and sold firms with the shortest CEO contracts would have earned 9.9% annual abnormal returns during the sample period. CEOs with short-term contracts invest less but exhibit higher profitability than their peers. This is consistent with the argument that short-term oriented CEOs sacrifice long-term investments for short-term value maximization. Short employment contracts also have a positive disciplining effect. When CEOs with longer term contracts are up for contract renewal and the probability of termination is high, they overinvest in unproductive or excessively risky projects and thereby destroy firm value by 34% more than CEOs with shortest term contracts in the cross-section.

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