Brian F. Smith

Management succession and financial performance of family controlled firms

Abstract This paper examines the immediate and long-term impacts on financial performance of 124 management successions within Canadian family controlled firms. When family successors are appointed, stock prices decline by 3.20% during the 3-day (−1 to +1) event window, whereas there is no significant decrease when either non-family insiders or outsiders are appointed. However, a cross-sectional analysis indicates that the negative stock market reaction to family successors is related to their relatively young age which may reflect a lack of management experience rather than their family connection per se. Investors are uncertain about the “management quality” of family successors who have less established reputations than more seasoned non-family insiders and outsiders. Non-family member appointments tend to follow periods of poor operating performance implying that there might be more scope for improvement when a non-family successor is appointed. Unlike the US sample in McConaughy et al. [McConaughy, D.L., Walker, M.C., Henderson, G.V., Mishra, C.S., 1998. Founding family controlled firms: efficiency and value, Review of Financial Economics 7, 1–19.], which indicates that the median percentage of votes held by controlling families is less than 15%, the Canadian sample indicates a more concentrated ownership with the median percentage of family controlled votes exceeding 51%. Of the firms in our sample, 62% use dual class capitalization to maintain control within the family.

Relative Prices of Dual Class Shares

Empirical studies of dual class shares indicate that superior voting shares (SVS) sell at a premium relative to their counterpart restricted shares (RVS). This paper uses Toronto Stock Exchange data to show that SVS price premium over RVS reflects the expected takeover premium paid to shareholders outside the control block. Thus, marginal shareholders pay a higher SVS price in anticipation of receiving a differential takeover bid as suggested by the extra merger hypothesis. Further analysis indicates that voting power increases the price premium while ownership, size, and the higher trading liquidity of RVS are inversely related to the premium.

Dual class firms: Capitalization, ownership structure and recapitalization back into single class

Abstract This paper analyses changes in capitalization and control of dual class firms before and after IPO. The results indicate that the combination of a large controlling shareholder with family interests, rather than concentrated ownership per se, leads to dual class capitalization. During the first 15 years post-IPO, voting leverage continuously increases as the dual class firms issue more restricted than superior voting shares. However, control changes are equally frequent for dual and single class firms suggesting that dual class capitalization is not used to unduly entrench management. We document disputes between restricted and superior voting shareholders to illustrate the potential corporate governance problems which are associated with dual class capitalization. As a result of these disputes, investor interest in dual class equity has decreased and there is a recent trend toward reclassification back into single class equity.

Intraday volatility and trading volume after takeover announcements

Abstract This paper examines transactions data regarding the markets reaction to 258 takeover announcements on the Toronto Stock Exchange (TSE) from 1977 to 1989. The study analyzes volatility and volume of target firms stock during the first trading day following a takeover announcement. A cross-sectional analysis relates this intraday volatility and volume to various aspects of a takeover announcement that proxy for the certainty of payoff to shareholders. Post-announcement volatility is highest when takeover announcements involve share exchange bids which are contested. Trading volume is highest when bids are contested and involve a large initial price change.

The wealth effects of deregulation of Canadian financial institutions

Abstract Canada, like other industrial countries, recently introduced various financial reforms to remove the barriers separating the operations and ownership of banks from non-bank financial institutions. This study analyzes the wealth effects of the reforms on the banks and non-bank financial institutions and the changes in their systematic risk resulting from financial deregulation over the period 1984 to 1991. The results indicate that while there was a significant cumulative gain for the insurance industry, unlike a number of U.S. studies, there was no evidence of wealth transfer among the institutions during the period of deregulation of the Canadian financial system. Additional tests indicate that although the regulatory changes did not have a significant effect on the risk of the banks, the systematic risk of the non-bank financial institutions increased significantly during the period of regulatory reforms.

Information flows and open outcry: evidence of imitation trading

Abstract We provide empirical evidence on how market making is affected by the existence of a crowd in a floor trading system based on data from the Toronto Stock Exchange which closed its trading floor in April 1997. While effective bid–ask spreads, trading volume and average trade size are unchanged with the introduction of system-only trading; for floor-traded securities, there is strong evidence that given type of event (trade or quote change) occurs with greater probability following an event of the same type than it does unconditionally. We examine the three hypotheses put forward by Biais et al. (1995) and find sufficient evidence to reject the hypotheses of strategic order splitting and, similar but successive reaction to the same events. We are unable to reject the hypothesis of traders engaging in imitating behavior which is likely to arise when traders can better identify each other in the trading environment.

Do Insiders Play by the Rules

The article studies compliance with insider trading regulations of the Ontario Securities Act (OSA) and the Toronto Stock Exchange. In contrast to the scarcity of prosecutions, we find large-scale evidence of insider trading and reporting violations. For example, from 1987 to 2000, approximately 50 percent of firms engaging in stock buybacks do not disclose their trades to the Ontario Securities Commission as required under the OSA. Furthermore, the volume of insider trading is much higher than expected before material news announcements. We offer a number of policy prescriptions to improve compliance.

Comparative study of complete tender offers and partial acquisitions

Abstract This paper compares and contrasts complete tender offers with partial acquisitions to assess the benefits derived from delisting and the elimination of agency costs associated with minority shareholders. The sample comprises 160 successful tender offers consummated on the Toronto Stock Exchange from 1977 to 1989. The empirical evidence indicates that, after controlling for other factors, target shareholders receive significantly higher returns in complete tender offers compared to partial acquisitions. On the announcement day, target shareholders of complete tender offers gain 21.90% while those of partial acquisitions gain 12.80%. The results also show that cash offers increase returns in complete tender offers. There is weak evidence that the gains to target shareholders in partial acquisitions are positively related to increases in bidder ownership. Further analysis indicates that there is no significant difference in target shareholder gains for a subsample of going private transactions compared to buyouts by outside shareholders.

Concentrated control and corporate value: a comparative analysis of single and dual class structures in Canada

This study directly examines the empirical relationship between corporate value and three distinct ownership structures using data from Canada, where the security laws and shareholder protection conditions are similar to those of the US (La Porta et al., 1999) but corporate control tends to be more concentrated (Holderness et al., 1999). Ownership structure is classified in three ways: dual class firms, single class closely-held firms and widely-held firms. The focus of this article is to test for the impact of concentrated control on corporate value using either dual class or single class closely-held ownership structure. The empirical results, using both fixed and random effects estimation methods, show that after controlling for size, financial leverage, percentage of outside directors and industry differences, dual class companies sell at a significant discount compared to closely-held single class companies. Consistent with Claessens et al. (2002), and Gompers et al. (2004) dual class structure in Canada lessens corporate value because it lowers shareholder and manager alignment and increases agency problems. We also find that pyramid structure has a negative impact on value in both dual class and single class closely-held companies.

The risk of dual classes of shares: Are there differences?

Abstract This paper uses data from the Canadian equity market to provide evidence on differences between the systematic and total risk of dual classes of shares. Despite the differences in voting power and characteristics such as preferential dividends, both the unadjusted ordinary least squares (OLS) betas and the Dimson adjusted betas show that, on average, there is no difference between either the systematic risk or the total risk of superior shares and their counterpart restricted shares. The evidence on equality of systematic risk of the dual classes of shares implies that in calculating the cost of equity of a company with dual classes of shares, the systematic risk coefficient of either class of shares can be used. Further evidence from the results indicates that investors cannot achieve significant portfolio diversification by substituting one class of equity shares of a company for another, because there is a very high correlation between the two classes of shares.