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Large shareholders, control contestability and firm productive efficiency

  • S.I.: MOPGP 2017
  • Published:
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Abstract

This paper investigates the effect of the largest controlling shareholders on firm productive efficiency. Using a sample of French listed firms, we employ parametric (linear regression), semi-parametric (Olley and Pakes) and non-parametric (Data Envelopment Analysis) approaches to estimate productive efficiency. We find a negative association between the excess control rights of dominant owners and firm productive efficiency, indicating that their private benefits of control prevent them from favoring productive projects. Our findings withstood several sensitivity and endogeneity tests. Additional analysis shows that multiple large shareholders, beyond the controlling owner, play a governance role that neutralizes the effect of excess control on productive efficiency.

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Notes

  1. Throughout this article, we will use the terms “largest controlling shareholder” and “controlling owner” interchangeably.

  2. Bebchuck et al. (2000, p 1) define a controlling minority structure as “an ownership structure in which a shareholder exercises control while retaining only a small fraction of the equity claims on a company’s cash flows”.

  3. For instance, Palia and Lichtenberg (1999) find that the stock market rewards firms with higher productivity levels by increasing their values.

  4. An interesting example of tunneling activities can be identified in reference to the Belgian company Barro (see, Johnson et al. (2000) for more details on this case of tunneling). As one of their accusations, Barro’s shareholders argued that Flambo (Barro’s controlling owner) had used Barro’s utilities without paying for them.

  5. In this study, we focus on productive efficiency, which reflects how a firm employs inputs to produce output. To assess productive efficiency, we must adopt a measure of output per unit of total input. Therefore, we use Total Factor Productivity, which is a commonly used measure of producer efficiency. Palia and Lichtenberg (1999, p 327) point out: A good index of efficiency must account for, and give proper weight to, the services of all of the inputs employed by the firm. TFP is such an index; it is defined as output per unit of total input […].

  6. The opreg code has been used by other researchers such as Hasan et al. (2016).

  7. https://www.insee.fr/fr/statistiques.

  8. A corporation or financial institution is considered to be widely held if it has no shareholder with at least 10% of its voting rights (Boubaker et al. 2014; Ben-Nasr et al. 2015).

  9. The OLS approach is also used here to achieve comparability with the results of many prior studies such as Palia and Lichtenberg (1999), Faccio (2010) and Tian and Twite (2011).

  10. The economic significance is computed as the standard deviation of Excess Control, multiplied by its coefficient in Column (1) of Table 3, all divided by the average TFPOP, that is, 0.185 × (− 0.250)/0.479 = −0.096.

  11. Despite the advantages of DEA, we would be remiss not to underscore some of its limitations (see, for example, Taylor and Harris 2004 and Vidal-García et al. 2018). For example, the method is sensitive to outliers and to errors in inputs and outputs. Moreover, DEA-efficient observations have the same score and do not show any differences between them. Another limitation relates to the absence of a theoretical maximum to which each observation is compared.

  12. For an overview of the DEA method, see Seiford and Thrall (1990) and Van Biesebroeck (2007).

  13. The results remain qualitatively the same when we consider two outputs, namely, total sales and sales growth.

  14. To obtain fixed effects panel estimation, we use Stata’s command xtreg, with the fe option.

  15. Please note that widely held firms are not included in any of the subsamples described in this section.

  16. The results of this additional analysis remain qualitatively the same when TFPOLS or TFP obtained using DEA are used (unreported).

  17. The results remain robust after dividing the sample into two groups based on the median VRRATIO (not reported).

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Authors and Affiliations

  1. EM Normandie Business School, Métis Lab, Paris, France

    Sabri Boubaker

  2. Institut de Recherche en Gestion (EA 2354), Université Paris Est, Créteil, France

    Sabri Boubaker

  3. Neoma Business School, Mont-Saint-Aignan, France

    Riadh Manita

  4. Montpellier Business School, Montpellier Research in Management, Montpellier, France

    Wael Rouatbi

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  1. Sabri Boubaker
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Boubaker, S., Manita, R. & Rouatbi, W. Large shareholders, control contestability and firm productive efficiency. Ann Oper Res 296, 591–614 (2021). https://doi.org/10.1007/s10479-019-03402-z

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