Øyvind Bøhren

Governance and Performance Revisited

Using unusually rich and accurate data from Oslo Stock Exchange firms, we find that corporate governance matters for economic performance, that insider ownership matters the most, that outside ownership concentration destroys market value, that direct ownership is superior to indirect, and that performance decreases with increasing board size, leverage, dividend payout, and the fraction of non-voting shares. These results persist across a wide range of single-equation models, suggesting that governance mechanisms are independent and may be analyzed one by one rather than as a bundle. Several significant relationships change sign or disappear in simultaneous equation models. This apparent indication of optimal, firm specific governance systems may instead reflect weak instruments caused by underdeveloped theories of how governance and performance interact.

Governance and Politics: Regulating Independence and Diversity in the Board Room

This paper analyzes the economic rationale for board regulation in place and for introducing new regulation in the future. We relate the value of the firm to the use of employee directors, board independence, directors with multiple seats, and to gender diversity. Our evidence shows that the firm creates more value for its owners when the board has no employee directors, when its directors have strong links to other boards, and when gender diversity is low. We find no relationship between firm performance and board independence. These characteristics of value-creating boards support neither popular opinion nor the current politics of corporate governance.

Mandatory Gender Balance and Board Independence

We find that forcing radical gender balance on corporate boards is associated with increased board independence and reduced firm value. A mandatory 40-percent gender quota shifts the average fraction of independent directors from 46 to 67 percent because female directors are much more often independent directors than males are. This shock to board independence via gender quotas is strongest in small, young, profitable, non-listed firms with powerful stockholders and few female directors. Such firms also lose the most value, presumably because they need advice from dependent directors the most and monitoring by independent directors the least.

Determinants of Intercorporate Shareholdings

This paper examines why firms choose to spend resources on acquiring ownership rights in other firms. Based on a unique data base of every individual intercorporate shareholding on the Oslo Stock Exchange during the period 1980–1994, we find that such investments serve at least three functions. First, they play a role incorporate governance, as managers in firms with low insider holdings, diffuse ownership structure and high free cash flow tend to mutually acquire equity stakes in each other, possibly in a collective attempt to protect their human capital in the market for corporate control. Second, interfirm equity holdings serve as financial slack for growing firms, reducing potential adverse selection costs by providing an internal funding source for new investments in long-term assets. Finally, our findings also suggest that intercorporate shareholdings are an integrated part of the investor’s cash flow management system by being a liquidity buffer when cash inflows and cash outflows are non-synchronous.

Corporate cross-ownership and market aggregates: Oslo stock exchange 1980–1990

Corporate cross-ownership results in double counting of assets in the markets valuation of total equity. This paper is the first to use firm-specific data to measure the resulting bias in market capitalization, market portfolio return, capital structure, and the P/E ratio. Based on the population of firms on the Oslo Stock Exchange, we found substantial distortions of market aggregates: The average size of the equity market was overstated by 20%, financial leverage was underestimated by 7%, and the market portfolio return was underestimated by 31%. Double counted earnings offset the bias in market capitalization, leaving the P/E almost undistorted.

The Duration of Equity Ownership

To date little is known about how long equity ownership lasts, what determines its length, and whether ownership duration is related to firm performance. Using a unique time series of equity holdings over eleven years, we find that on average the firms largest owner stays less than three years and stays longer than owners with smaller stakes. The duration of financial institutions and foreigners is shorter than that of individuals and industrial firms. We show that ownership duration is duration dependent as the probability of closing an equity position is a function of how long the owner has held the stake. Ownership duration appears to match the duration of the firms investment projects. We find no evidence that large owners vote by foot in the sense that bad news about earnings leads to duration ending. There is a negative relationship between ownership duration and a firms performance in general, but the sign and strength of this relationship differs across owner types. Long duration by financial institutions and industrial corporations is negatively related to performance, whereas the opposite is true for individuals. This suggests that long term ownership may improve firm performance if the monitoring is direct as opposed to delegated.

Risk components and the market model: a pedagogical note

Teaching modern finance involves familiarizing the student with terms like total risk, systematic risk, unique risk, beta, and R2. Although each of these concepts may be relatively easy to communicate and digest one by one, it is harder to see their internal links. Using the logic of the market model, this note offers a simple framework for presenting the basic risk concepts in an integrated way.

Theory development processes in the social sciences: The case of stochastic choice theory

Abstract Almost three hundred years ago, Pascal and de Fermat produced a quantitative model for choice under uncertainty, based on expected payoffs. This event triggered a theory development process fueled by contributions like the logarithmic utility model of Bernoulli, the expected utility theorem (EUT) of von Neumann and Morgenstern, the non-expected utility (NEU) theories of Allais, Bell, and Machina, as well as a long series of empirical studies. This article uses the paradigm-oriented framework of Kuhn and Lakatos to describe and evaluate the history of ideas in stochastic choice theory. Particular attention is paid to the rivalry between the EUT and various NEU models, which has been called one of this centurys most important disputes in the social sciences. Specific issues include the quick acceptance of the EUT, the large export of the EUT to several decision-oriented disciplines, and the periods of progress, stagnation and revitalization of NEU research. The article also contrasts the EU and NEU schools by analyzing the remarkable consensus on subject and methodology, the ambiguous use of the rationality concept, the difference in basic implicit assumptions, and the heterogeneous response to given empirical findings.

Dividends and Taxes: The Moderating Role of Agency Conflicts

We find that potential conflicts between majority and minority shareholders strongly influence how dividends respond to taxes. When the controlling shareholder has a smaller stake, the incentives to extract private benefits are stronger – a shareholder conflict that can be mitigated by dividend payout.We study a large and clean regulatory shock in Norway that increases the dividend tax rate for all individuals from 0% to 28%. We find that dividends drop less the higher the potential shareholder conflict, suggesting that dividend policy trades off tax and agency considerations. The average payout ratio falls by 30 percentage points when the conflict potential is low, but by only 18 points when it is high. These lower dividends cannot be explained by higher salaries to shareholders or diverse liquidity needs. We also observe a strong increase in indirect ownership of high-conflict firms through tax-exempt holding companies and suggest policy implications for intercorporate dividend taxation.