The Cost of Insecure Property Rights: R2 Revisited

In the conventional CAPM model only a single risk factor is considered. However, using a world market portfolio to estimate systematic risk in national portfolios little of the required rate of return is explained in developing as compared to developed countries. Adding a factor representing institutional risk the predictive power increases substantially. By stressing importance of property and investor rights in this fashion, we add to the research on international differences in R2 initiated by Morck et al. (2000). Our findings are consistent with the hypothesis that stock price synchronicy depends on the institutional quality.Asset pricing; International financial markets; Property rights; Financial economics

Ownership Structure, Control and Firm Performance: The Effects of Vote Differentiated Shares

This paper contributes to the literature on ownership, control and performance by exploring these relationships for Swedish listed companies (1997-2002). We find that firms, on average, are making inferior investment decisions and that the use of dual-class shares have a negative effect on performance. According to our results concentration of ownership has a negative impact on investment performance and firm value when control instruments that separate votes from capital share are used. Marginal q is used as a measure of economic performance. It was presented in an article by Mueller and Reardon in 1993 and has recently been used in empirical studies of ownership and performance by among others Gugler and Yurtoglu (2003). Frequently Tobin’s q is used in studies of this type, but Tobin’s q has a number of disadvantages which can be circumvented by employing a marginal q. This study adds to earlier studies by investigating how the separation of vote and capital shares’ creates a wedge between the incentives and the ability to pursue value maximization. The relationships between the performance measure and different ownership characteristics like ownership concentration and foreign ownership are also investigated.marginal q; ownership structure; firm performance; investments; dual-class shares

Ownership Dispersion and Capital Structures in Family firms: A study of closed medium sized enterprises

Family firms are entities that possess and contribute greatly to all economies worldwide. In the following study we investigate capital structures and ownership dispersion among Swedish family firms. In order to find concluding results, we proceed with a regression between leverage and family business, leverage and family firm age, and leverage and ownership dispersion. Our regression outcomes support a U- shaped relationship between family ownership dispersion and leverage, but do not confirm a relation between leverage and family business. Earlier studies made in the field have generated differing results; however, there are some studies that are actually in line with our findings. A unique database developed at Jönköping University is used that enables us to obtain access to firm level data. Earlier studies in the same genre have only had access to industry level data.Family firms; Capital structure; Closed medium sized enterprises; Ownership Dispersion; Corporate Governance

Institutional Ownership and the Returns on Investment

By examining a large number of Swedish listed firms, we analyse how institutional and foreign owners affect investment performance. To measure investment performance Mueller and Reardon’s (1993) marginal q is used, although derived directly from Tobin’s average q. Marginal q measures the ratio of the return on investment to the cost of capital. Our findings show that both domestic and foreign institutional owners positively influence firm performance. Furthermore a non-linear relation between institutional ownership concentration and performance is found. This is consistent with positive incentive effects and negative entrenchment effects. During the last decades the ownership structure of Swedish firms has undergone dramatic changes: institutional and foreign investors have been increasing their stakes, whereas Swedish households have decreased in importance. Controlling owners, often founding families, remain in control by resorting to an extensive use of dual-class shares. The practice of dual-class shares which separates cash-flow rights and control rights is also found to be an important determinant of firm performance that eradicates the positive influence of institutional ownership.Corporate governance; institutions; ownership; performance; Tobin’s q; marginal q;

Allocation of 3G Rights, Credibility and the Rules of the Game Experiences of the Swedish 3G Beaty Contest

As in many other countries Sweden has recently allocated licenses to the third generation (3G) of wireless telecommunication technology. But in contrast to Britain, Germany and Denmark, for example, a so-called beauty contest was used to earmark the rights. Promises of future infrastructure investments were used as criterion in the allocation of spectrum rights. The motivation was that using criteria other than price in the portioning of rights would be to the advantage of both consumers and producers and speed up the infrastructure investments. This paper questions the credibility of the promises made and claims that credibility of promises is a key problem in the use of beauty contests as allocation mechanism. The alternative allocation mechanism, an auction, does not suffer from the same problems of credibility. What is remarkable is that there was not much of economic analysis behind the decision to choose a beauty contest. Considering that the choice was between two ways of allocating rights to a scarce resource, the use of the radio spectrum, economists should have something to contribute. But surprisingly, they have not offered much. Theoretical underpinnings for the use of beauty contests seem to be lacking and the economic literature has very little to say. About the alternative, auctions, it has a lot to offer. An evaluation of a beauty contest is thus a little of a green field exercise. A strand of the literature that could serve as a theory of beauty contests is that of competition for the market. This is an approach inspired by institutional economic analysis adopted in this paper. Auctions and beauty contest can be looked upon as ways to achieve some of the goals of regulation without the negative effects on the entrepreneurial spirit. The purpose of the paper is to evaluate a beauty contest like the one staged in Sweden for the allocation of 3G rights from an entrepreneurial perspective. A comparative analysis is made with auction as an alternative means of allocation.Beauty contest; Allocation of spectrum rights; Opportunistic behavior; Ex post dimension of contracts

Remittances and Investment

Vinnova diarienr 2008-0078

A regulation and transaction cost perspective on the design of corporate law

For the corporate business model to be successful, it is important to align the interests of those who control and finance the firm. Corporate law has here an important task to fulfill. It offers a legal framework that can facilitate parties to conclude mutually preferable agreements at low transaction costs. The purpose of this paper is to show how to design corporate law to fulfill this task and apply this knowledge to a Swedish case. A two-dimension model that simultaneously considers both the regulation intensity and the level of default of corporate law is presented. The earlier literature treats these dimensions separately. By adding a transaction cost perspective to our model, we assess different regulatory techniques and examine how the Swedish legislation can be amended to help corporations by offering a standard contract that lowers the transaction costs of contracting. This can be achieved if default rules or standards of opt-out character are combined with other regulatory techniques with lower transaction costs such as opt-in alternatives and menus. We also show how our model can be used in other studies as a tool to analyze the design of legal rules.Funding Agencies|Vinnova project "Financing of Innovation"</p