Family and Dispersed Ownership in Swedish, Public Companies An Analysis of Costs of Private Benefits of Control and Agency Costs

This paper examines the relationship between corporate ownership structure and firm performance, approximated by Tobin’s Q. I distinguish between costs of private benefits of control, due to expropriation of minority shareholders, and agency costs, due to poor management. Data on 144 Swedish public companies observed over the years 1985 to 2000, are used in fixed firm-effects estimations. The results indicate that family control, per se, leads to slightly worse firm performance than a dispersed ownership structure with a professional manager in control. The agency costs associated with family control are larger than the costs of private benefits of control associated with professional managers and a dispersed ownership structure. It is argued that this is mainly caused by entrenchment of founder heirs, exhibiting poor management skills, which in turn leads to agency costs. Furthermore, if the family controls the CEO-position the negative effect on firm performance increases. The argument for this is that the CEO-position entrenches the owner even further, which amplifies the agency costs. This effect mainly stems from founder family controlled firms, where the agency costs are already high. Dual-class shares in combination with a CEO-position, further deteriorates firm performance. The owner is powerful enough to extract more private benefits, when his or her incentives to do so are greater. Since it is quite common for families to control the CEO-position, and the use of super-voting shares is widespread, family firms perform worse than firms with dispersed ownership. In particular, founder family firms have the worst firm performance. This is partly explained by the fact that these owners have, in many cases, inherited their position, thus lacking the right skills, but also because of the prevalent control of the CEO-position, and use of super-voting shares