Block Trading, Ownership Structure, and the Value of Corporate Votes

This paper shows that open market block trading can provide a link between private benefits of control enjoyed by large shareholders and the ?voting premium?, i.e. the price difference between voting and non-voting shares. We first demonstrate in a microstructure model with informed traders and short-selling constraint that the trading activity of blockholders translates into a spread between the prices of voting and non-voting shares. In contrast to the extant theory, this model can explain the voting premium in the absence of corporate takeovers. In the empirical part of the paper, we show for a comprehensive sample of German dual-class companies that large trades occur more often in voting shares than in non-voting shares, and that the block trading activity in voting shares is strongly correlated with the voting premium. Moreover, the effect of the ownership structure on the voting premium becomes insignificant once we control for the block trading activity in voting shares. --

Selecting Comparables for the Valuation of European Firms

This paper investigates which comparables selection method generates the most precise forecasts when valuing European companies with the enterprise value to EBIT multiple. We also consider the USA as a reference point. It turns out that selecting comparable companies with similar return on assets clearly outperforms selections according to industry membership or total assets. Moreover, we investigate whether comparables should be selected from the same country, from the same region, or from all OECD members. For most European countries, choosing comparables from the 15 European Union member states yields the best forecasts. In contrast, for the UK and the US, comparables should be chosen from the same country only.comparables, selection method, valuing companies, forecasts, EBIT, industry membership, ROA

Residual-Based Tests for Fractional Cointegration

This paper reports on an extensive Monte Carlo study of seven residual-based tests of the hypothesis of no cointegration. Critical values and the power of the tests under the alternative of fractional cointegration are simulated and compared. It turns out that the Phillips-Perron t-test when applied to regression residuals is more powerful than Geweke-Porter-Hudak tests and the Augmented Dickey-Fuller test. Only the Modified Rescaled Range test is more powerful than the Phillips-Perron test in a few situations. Moreover in large samples, the power of the Phillips-Perron test increases if a time trend is included in the cointegrating regression

Discussion of “Are CEOs compensated for value destroying growth in earnings?”

This discussion provides several explanations for the evidence presented in Balachandran and Mohanram (2010) that are consistent with efficient contracting. I also show that—contrary to the suggestion of the title—CEOs do not benefit from value destroying growth in earnings. Finally, I argue that there is no conclusive evidence that corporate investments destroy value

Bankers and the Performance of German Firms

In this paper we analyze the impact of banks on German non-financial companies through ownership stakes and board representation. We find that the correlation between firm value and bank representation is negative and highly significant. By exploring the time series dimension of our dataset, we show that bank presence causes lower performance while there is no evidence of causality in the opposite direction. Our results suggest that bankers are attracted to the boards of those companies where they can extract larger benefits of control: Banks are systematically more represented on the boards of companies that are larger, have more intangible assets and offer higher board remuneration. There is little evidence that banks facilitate lending or monitor existing debt contracts. Whereas block ownership by non-banks is associated with better performance, there is no such relationship for banks.

Valuation biases, error measures, and the conglomerate discount

We investigate biases of valuation methods and document that these depend largely on the choice of error measure (percentage vs. logarithmic errors) used to compare valuation procedures. We analyze four multiple valuation methods (averaging with the arithmetic mean, harmonic mean, median, and the geometric mean) and three present value approaches (dividend discount model, discounted cash flow model, residual income model). Percentage errors generate a positive bias for most multiples, and they imply that setting company values equal to their book values often becomes the best valuation method. Logarithmic errors avoid unwanted consequences and imply that the median and the geometric mean are unbiased while the arithmetic mean is biased upward as much as the harmonic mean is biased downward. The dividend discount model dominates the DCF-model only for percentage errors, while the opposite is true for logarithmic errors. The residual income model is optimal for both error measures

Biases and Error Measures: How to Compare Valuation Methods

We investigate biases of valuation methods and document that these depend largely on the choice of error measure (percentage vs. logarithmic errors) used to compare valuation procedures. We analyze four multiple valuation methods (averaging with the arithmetic mean, harmonic mean, median, and the geometric mean) and three present value approaches (dividend discount model, discounted cash flow model, residual income model). Percentage errors generate a positive bias for most multiples, and they imply that setting company values equal to their book values dominates many established valuation methods. Logarithmic errors imply that the median and the geometric mean are unbiased while the arithmetic mean is biased upward as much as the harmonic mean is biased downward. The dividend discount model dominates the discounted cash flow model only for percentage errors, while the opposite is true for logarithmic errors. The residual income model is optimal for both error measures

Why Votes Have a Value

We perform an experiment where subjects pay for the right to participate in a shareholder vote. We find that experimental subjects are willing to pay a significant premium for the voting right even though there should be no such premium in our setup under full rationality. Private benefits from controlling the firm are absent from our setup and overconfidence cannot explain the size of the observed voting premium. The premium disappears in treatments where voting has no material consequences for the subjects. We conclude that individuals enjoy being part of a group that exercises power and are therefore willing to pay for the right to vote even when the impact of their own vote on their payoffs is negligible.Smoking, Voting, dual-class shares, paradox of voting, experimental economics

Bankers and the performance of German firms

We analyze the role of bankers on the boards of German non-financial companies for the period from 1994 to 2005. We find that banks that are represented on a firm’s board promote their own business as lenders and as M&A advisors. They also seem to act as financial experts who help firms to obtain funding, especially in difficult times. We find little evidence that bankers monitor management and suggest that bankers on the board cause a decline in the valuations of non-financial firms. Banks’ equity ownership declined sharply during our sample period and the German financial system lost some of its formerly distinctive features

Why Votes have a Value

We perform an experiment where subjects bid for the right to participate in a vote and where the theoretical value of the voting right is zero if subjects are fully rational. We find that experimental subjects are willing to pay for the right to vote and that they do so for instrumental reasons. A model of instrumental voting behavior is consistent with our results if individuals are overconfident, overestimate the errors of other players, and also overestimate how often they themselves are pivotal for the outcome. Eliciting beliefs about pivotality shows that individuals value the right to vote more, the more they overestimate their probability of being pivotal. Eliciting beliefs about pivotality reduces the willingness to pay for the right to vote