Patient ownership

The key question here is whether the holding period (duration) of large stockholders influences the firm's behavior and performance. Academics, managers, and regulators have all argued that unless equity investors leave the management team sufficient time to innovate, develop, and commercialize new ideas, firm value will be destroyed. This value destruction supposedly occurs when managers reject long-term projects in favor of short-term ones, even if the former have higher net present value. Thus, ownership duration matters for firm performance, and less value is created the shorter the investors' holding period. Conversely, performance would improve if firms had a more stable, long-term ownership structure.

There are at least two reasons to challenge this praise of the patient investor as a vehicle for increasing the planning horizon of managers. First, if capital markets are informationally efficient, investors can value a firm's future expected cash flow independently of its current earnings. They will reward a firm for picking the project with the highest present value, no matter its duration. In such a world, ownership duration, project duration, and corporate performance would be unrelated. Second, the principal-agent model suggests that patient owners easily become passive monitors who leave managers too much power and discretion to waste corporate resources on unproductive activities. One may therefore expect that at least beyond a certain point, ownership duration destroys rather than creates value.

The reason this issue has received almost no attention in the literature is probably the lack of time series data on corporate governance mechanisms. Utilizing the data base described in project 1 above, we will first utililize our long time series to describe the anatomy of patient ownership, basically treating ownership duration as a governance mechanism. For instance, we will describe the empirical frequency distribution of ownership duration for large owners and explore how it relates to owner characteristics like investor type and firm characteristics like firm size. Second, we will analyze the relationship between ownership duration and firm performance, also controlling for other determinants of performance, such as other governance mechanisms like ownership concentration and firm characteristics like risk.

Publications

The results from this project has been published in two documents.

An academic paper The Duration of Equity Ownership

and a research report The Duration of Equity Ownership at the Oslo Stock Exchange 1989-1999

Presentations

This paper has been presented at various conferences and seminars. A list of seminars, which allows for downloading of overheads, is found here