Kasper Meisner Nielsen

The Principle of Proportional Ownership, Investor Protection and Firm Value in Western Europe

Previous research initiated by Claessens et al. (2002) has established a value discount of disproportional ownership structures. Due to omitted variables problems it is difficult to provide a causal interpretation of these findings. We provide a thorough analysis of this value discount in a large sample of Western European firms, which strengthens the causal interpretation that the discount is driven by incentive and entrenchment effects. First, we show that the value discount is higher in firms with low cash flow concentration, in family firms, in industries with higher amenity value and in countries with better investor protection. Second, we show that these findings are consistent with the predictions of a theoretical model of incentive and entrenchment effects. Third, we find little empirical evidence for a number of alternative omitted variable explanations, including: protection of private benefits; voting and block premia; low-liquidity discount; and, protection against uninvited takeovers. Fourth, we present the puzzling finding that the value discount is significantly higher in firms with dual class shares than in firms with pyramidal ownership. Fifth, we find no impact of disproportional ownership structures on operating performance. Finally, we discuss policy implications of these findings in relationship to the ongoing process of harmonization of the European capital markets.

What Death Can Tell: Are Executives Paid for Their Contributions to Firm Value?

Using stock price reactions to sudden deaths of top executives as a measure of expected contribution to shareholder value, we examine the relationship between executive pay and managerial contribution to shareholder value. We find, first, that the managerial labor market is characterized by positive sorting: managers with high perceived contributions to shareholder value obtain higher pay. The executive pay-contribution relationship is stronger for professional executives and for executives with high compensation. We estimate, second, that an average top executive (chief executive officer) appears to retain 71% (65%) of the marginal rent from the firm-manager relationship. We examine, third, how the executive pay-contribution relationship varies with individual, firm, and industry characteristics. Overall, our results are informative for the ongoing discussion about the level of executive compensation. This paper was accepted by Wei Jiang, finance.

Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market

This paper studies inattention to mortgage refinancing incentives among Danish households. Danish data are particularly suitable for this purpose because there are minimal barriers to refinancing, yet many borrowers fail to refinance optimally, and the characteristics of these borrowers can be accurately measured. The paper estimates a mixture model of household refinancing types in which household characteristics affect both inattention (a low proportion of rational refinancers) and residual inertia (a low probability that fully inattentive households refinance). Many characteristics move inattention and inertia in the same direction, implying a positive cross-sectional correlation of 0.62 between these two household attributes. Younger, better educated, and higher-income households have less inertia and less inattention. Financial wealth and housing wealth have opposite effects, with the least inertia and inattention among households whose housing wealth is high relative to their financial wealth. There is suggestive evidence of persistent unobserved heterogeneity in attention.

The Return to Direct Investment in Private Firms: New Evidence on the Private Equity Premium Puzzle

This paper uses a novel dataset to analyze the return to direct investments in private firms by pension funds. We have two key findings. First, direct investments in private firms have underperformed public equity by 392 basis points per annum under conservative risk adjustments. Second, initial mispricing, due to over‐optimism or misperceived risk, and subsequent low capital gains seem to explain the gap in returns to private firms. Overall, these findings complement the finding of Moskowitz and Vissing‐Jorgensen (2002) of low returns on entrepreneurial investments and provide new insight into the existence of what they call the private equity premium puzzle: Even professional investors with well‐diversified portfolios like pension funds seem to get a poor risk‐return tradeoff from investing directly in private firms.

Fire Sales and House Prices: Evidence from Estate Sales Due to Sudden Death

This study investigates when forced sales of real estate turn into fire sales by using a natural experiment that allows us to separate supply and demand effects: Forced sales result from sudden death of house owners and are thus unrelated to current market conditions. We find that forced sales result in fire sale discounts. Discounts increase when the sale is urgent, market conditions are poor, and the seller is financially constrained. Overall, our study identifies when forced sales lead to fire sale discounts, and highlights that fire sales occur even in the absence of temporary demand shocks. This paper was accepted by Amit Seru, finance .

When Blockholders Leave Feet First: Do Ownership and Control Affect Firm Value?

This study investigates the effect of ownership and control on firm value using exogenous variation resulting from stock price reactions to the sudden death of individual blockholders. Stock market reactions range from -5% to 4% for inside blockholders as ownership increases and from 0% to -2% for outside blockholders. The difference in market reactions identifies the value of ownership and control while effectively controlling for confounding effects on firm value due to liquidity or anticipated takeover activity. Overall, our results suggest that as ownership increases the beneficial effect of inside blockholders disappears while the beneficial effect of outside blockholders increases.

Spillovers in Asset Prices: The Curious Case of Haunted Houses

Exploiting the unique institutional setting of Hong Kong’s real estate market, we uncover a curious ripple effect of haunted houses on the prices of nearby houses. Prices drop on average 20% for units that become haunted, 5% for units on the same floor, 3% for units in the same block, and 1% for units in the same estate. Our study makes two contributions. First, our results provide an estimate of a large negative spillover on asset prices caused by an idiosyncratic shock to the perceived quality of an asset. Second, since we observe that this ripple effect exists even if the haunted house is not sold, we can isolate the quality channel from the price pressure channel. We find that the quality channel contributes significantly to spillovers in asset prices.

Return to Political Power in a Low Corruption Environment

We use exogenous changes in the size of local municipalities in Denmark to estimate the effect of political power on the income of politicians and their family members. We exploit two dimensions of political power: heterogeneity in politicians’ roles within a given district, and exogenous increases in political power as proxied by population and budget size. Our difference-in-differences results indicate that an increase in political power has: 1) an economically small but statistically significant effect on the income of re-elected politicians; 2) an economically larger effect on income of influential politicians such as coalition party leaders and mayors; and 3) an economically large effect on politicians’ offspring. We estimate a positive and significant elasticity of income to political power, which spans from 3 percent for re-elected candidates to 14 percent for mayors. To control for differential changes in electoral competition, we instrument the likelihood of re-election with average party votes in other municipalities and in national elections. We conclude that, even in a low-corruption environment, there is an economically relevant return to political power — beyond the return to office holding — which mostly benefits influential politicians and their offspring.

Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market

This paper studies inattention to mortgage refinancing incentives among Danish households. Danish data are particularly suitable for this purpose because there are minimal barriers to refinancing, yet many borrowers fail to refinance optimally, and the characteristics of these borrowers can be accurately measured. The paper estimates a mixture model of household refinancing types in which household characteristics affect both inattention (a low proportion of rational refinancers) and residual inertia (a low probability that fully inattentive households refinance). Many characteristics move inattention and inertia in the same direction, implying a positive cross-sectional correlation of 0.62 between these two household attributes. Younger, better educated, and higher-income households have less inertia and less inattention. Financial wealth and housing wealth have opposite effects, with the least inertia and inattention among households whose housing wealth is high relative to their financial wealth. There is suggestive evidence of persistent unobserved heterogeneity in attention.

Once Bitten, Twice Shy: The Role of Inertia and Personal Experiences in Risk Taking

We study how personal experiences affect individual risk taking. To separate the intertwining effects of personal experiences and wealth changes, our identification strategy relies on the decision to keep or rebalance unexpected inheritances of risky assets. Experience derives from investments in banks that defaulted in the aftermath of the financial crisis. To differentiate the effect of personal experiences, we classify the degrees of experiences into first-hand experiences from personal losses, second-hand experiences from the losses of close family members, and third-hand experiences from living in municipalities where banks defaulted. We find that thirdhand experiences result in marginally lower risk taking. Second-hand experiences have a relatively stronger negative effect, whereas the effect of first-hand experiences on risk taking is strongly negative. Overall, our results demonstrate that personal experiences aside from changes in wealth explain substantial heterogeneity in individuals’ risk taking. JEL Classifications: D03, D14, G11