Is there any difference between them?
Most studies of Corporate Governance-firm performance used different type of ownership variables as a proxy for the Internal Governance attitude of a firm. I need to know which variable is usually used to construct such data. Is it the outsider ownership (block-holding that exceeds 5% of the outstanding shares of the firm) or the number/percentage of shares held by the insider which exceeds 5% of the outstanding shares?
I think the concentrated ownership means high private control of a firm by the insiders (managers or board members). If so, do I have to sum up all the percentages of holding of the insiders that equal or above 5% to find the concentration of the ownership?
Other scholars have studied family-owned firms instead of publicly traded firms. Most of well-known data sources have a category called "private firms".
Does it mean family-owned firms in this case, or unlisted firms?
Any help will be highly appreciated.
THE 5% RULE: Significant share holding amount is 5% of the voting rights of the company's shares. when buying or selling of publicly trade securities, all 5% owners must disclose their status to avoid insider trading allegation. The 5% is 5% of voting rights held in one hand. It does not apply to proxy 5% which many different shareholders add their shares together in order to reach 5% threshold to force a motion not to be ignored in a board meeting---that 5% is used only for limited purpose. If a director owns 5% of the voting right, it is a significant shareholder and qualifies for this definition. if John Doe is not a director, but bought the stock through an exchange, i.e. NASDAQ or NYSE that amount to 5% of the total outstanding share (voting share), he is in the same shoes as the directors with 5% share.
PRIVATELY HELD FIRMS: Private firm or privately held firms are firms or companies that are not listed in the public exchange. They can be family-owned and many are not family owned. They can be both. They could be organized as sole proprietorship, partnership or corporation---but are not listed in the stock market. The issue of "governance" becomes an issue among these firms only when they become successful. Struggling firm or burgeoning firms do get concerned over corporate governance.
1. Concentrated Ownership simply refers to the case where majority of shares are held by few owners. Further, if more than 5%, 10%, 20% (different levels) of shares are held by the state, or group of companies, or a family or a foreign investor then you are in a position to identify the owner or block holder of the company.
2a. To calculate Ownership Concentration, you have to define the levels. For instance you can measure how much ownership is concentrated at Top 1 level. this means what percentage of shares are held by the largest shareholder of the company.
Similarly in literature, Concentration of Ownership at level 3 and 5 (percentage of shares held by 3 largest and 5 largest shareholders) has been calculated.
2b. To calculate family ownership you have to calculate percentage shares held by a family.
Similarly you can calculate, insiders shareholding, state ownership, foreign ownership etc.
3. Yes, the concentrated ownership means high control of a firm.
4. Private firms are unlisted.
I think that you have to make a difference at the same level of ownership's concentratrion between different blockholders:.
(1) If just one blockhober holds the majority of shares of one company he may try to expropriate minority shareholders.
(2) If two blockholders adding their percentage of shares hold the same level than in (1), then they will have to collude to reach the same equibrium than in (1). but if they are monitoring each other, this may benefit a lot to all shareholders..
(3) if blockholders have just a little part of their wealth invested in the shares of the firm, they will not suffer from lack of diversification, and their investment behavior will not be constrained (the reverse may be true for family firms).
institutional investors, hedge funds do not behave the same way as blockholders like families.
Dear Ruba,
There are some features of family-owned firms that go beyond the mere percentage of ownership. For example, at least at premature family-owned firms principle-principle conflicts of intererst are less common. Also, there is less need for disclosure at family-owned firms, which is not necessarily the case in corporations with concentrated ownership - for example, a 5-10% holding by one major shareholder does not render disclosure unnecessary for the other 95-90%. Finally, family-owned firms can bear the costs of a "rotten kid" acc. to the rotten kid theorem of Gary Becker, something that you will hardly encounter in public companies with block holders (well, this may be arguable in companies wíth high stakes hold by government which supports bureaucrats of questionable capabilities at executive level for political reasons).
Paul
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