Effects of Ownership Concentration on Performance of Austrian Listed Companies

Nouman Afgan



This paper applies panel data techniques to a sample of Austrian listed companies, in order to investigate the managerial discretion hypothesis and asymmetric information. The sample includes all non-financial companies listed at the Vienna Stock Exchange over the period 2007 to 2015. Investment in capital equipment is found to be highly sensitive to cash flows, thereby providing conclusive evidence that over-investment leads to returns on investment lower than the cost of capital.

In Austria, state companies operate in vital industries such as oil and gas distribution, electricity generation, and aerospace. For this part of the sample, the effect of the ratio of cash flow to capital stock CF/K is positive and highly significant, which provides strong evidence that managers exercise discretion while reinvesting cash flows. They may not only target sub-optimal projects but also invest beyond the optimal level of investment that would maximize firm value. Thus, managers of state companies pursue their own objectives.

The effect of voting rights of largest ultimate shareholders on performance follows the nonlinear shape of a cubic parabola, with a turning point at 53% voting rights’ concentration. Beyond this point, the steep downward slope provides strong evidence of the entrenchment hypothesis, with the negative entrenchment effect dominating the incentives effect. 43% of the companies fall in the downward sloping part of the curve that substantiates the evidence on value expropriation by largest shareholders. Despite the strong corporate governance regime, the study finds evidence of expropriation by ultimate shareholders to the detriment of minority shareholders.

Keywords: Corporate Governance, Managerial Discretion Hypothesis, Tobin’s q, Fixed Investment.


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