Corporate Control and Value Destruction

Abstract: Investigating a panel of Swedish public companies from 1986 to 2003 (4543 firm year observations) this paper investigates the effect of control structure and type of controlling owner on investment efficiency. Sweden is characterized by a high prevalence of voting and cash flow rights separation, as well as controlled ownership structures where families are the most recurrent ultimate owners in control. Previous studies have found that these factors have a negative impact on firm value. A recently developed method, marginal q, is implemented to measure the effect of these observed ownership characteristics on investment efficiency. Where controlling owners are either families or widely held corporations, investment efficiency is found to be significantly lower, partly explaining the valuation discount. Previous research suggests that this relates to non-pecuniary private benefits of control, such as prestige, rather than direct expropriation of minority shareholders. The dominant owners in Sweden prefer control to returns.