Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
Institutional Ownership in Newly Traded Firms
Benedicte Millet-Reyes*
This empirical study examines the role of institutional ownership in newly traded firms. The
sample includes fifty one initial public offerings that took place in France between 2004
and 2009. French firms provide an interesting set of internal and external corporate
governance tools since they can choose between a unitary or two-tier board structure.
They also have unique ownership characteristics including concentrated shareholdings
and historical links with French institutional investors. Regression results show that board
characteristics are significant determinants of institutional shareholdings, but only for
French institutions who concentrate their holdings in two-tier board structures. Foreign
institutional investors seem to behave as passive minority shareholders who concentrate
on firm size and stock market liquidity.
Field of Research: Corporate governance
1) Introduction
Board structure and ownership characteristics are increasingly seen as interdependent tools
that can improve corporate performance. Rather than ranking the effectiveness of corporate
governance mechanisms, recent studies have concentrated on their interaction inside the firm.
This paper provides new evidence on this topic by focusing on recent French initial public
offerings. France offers a unique corporate environment since firms can choose their board
structure (one tier or two-tier). Concentrated ownership structures also create a specific set of
corporate governance issues related to the protection of minority shareholders. In this context,
French institutional investors have historically played a monitoring role as opposed to foreign
institutional owners who remain minority shareholders.
This paper investigates how institutional owners impact the corporate governance and
financial performance of newly traded firms in France. Section 2 provides a recent literature
review on the interdependence of board and ownership structures. Special emphasis is placed
on empirical studies that concentrate on French corporate governance. Section 3 describes
the sample construction process and provides non parametric tests and descriptive statistics
based on board categories. Hypotheses and regression results are developed in section 4,
followed by a conclusion in section 5.
2) Literature Review
In this section, existing empirical evidence is provided on two main topics: the impact of
corporate governance on firm performance, and its interaction with ownership characteristics.
Special emphasis is placed on the role of institutional investors.
The literature on corporate board characteristics often concentrates on board size,
___________________________________________________________________________
*Department of Finance, Economics, and Real Estate, Leon Hess Business School, Monmouth University, West
Long Branch NJ 07764. Email: breyes@monmouth.edu
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Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
independence of directors, executive versus non-executive directors, separation of chair and CEO
functions, and composition of committees. Most studies find empirical evidence between some
attributes of unitary boards and firm performance but their results are often contradictory (see
Andres et al., 2005). For example, Bhagat and Black (2002) do not find any correlation between
independent boards and long-term performance. Brown et al. (2011) provide an extensive review
of accounting and finance research on corporate governance and emphasize that governance
indices should be sensitive to local institutional arrangements. However, limited evidence is
available on the impact of one-tier versus two-tier board structures because most legal systems
allow only one type of corporate boards.
Most common-law countries like the U.S. or the U.K. only use unitary board structures which end up
delegating power to management. By contrast, Germany only offers two-tier boards with a nonexecutive supervisory board and a requirement of employee representation. In their European study,
Davies and Hopt (2013) underline two main factors that influence the role of boards: concentrated
versus dispersed shareholdings, and the emphasis placed on stakeholders versus shareholders. They
question the rise of independent director requirements in Europe since block shareholders still
dominate as the main form of ownership structure. Urtiaga and Saez (2012) argue that the concept of
independent directors is not suited to solve governance issues generated by concentrated ownership
structure. Controlling shareholders can easily monitor managers without the use of independent
directors. However, external regulation may be needed to avoid expropriation of minority shareholders.
La Porta et al. (1998, 2000) have provided ample evidence that country-specific regulations have an
impact on the protection of minority shareholders and the efficiency of corporate governance codes.
Since 1966, French firms have been allowed to choose between a unitary board with a combined
chairman and CEO position, and a two-tier board structure including a supervisory board,
management board, and separate chairpersons. Also, France has implemented legal reforms that
include all stakeholders and counterbalance its Civil Law legal origin. Blazy et al. (2012) construct
indicators to measure the evolution of corporate governance rules in France between 1977 and 2004.
They show that the legal protection of shareholders, employees and bondholders has steadily
improved and has been accompanied by the development of financial markets. In 2009, France
implemented newly revised corporate governance codes (written by AFEP/Medef and Middlenext)
which are supposed to emphasize the role of independent directors while taking into account
ownership concentration, board categories and firm size.
Rather than ranking the effectiveness of corporate governance mechanisms, the recent literature has
focused on their interdependence. Special emphasis is placed on the role of institutional investors in
affecting corporate governance practices around the world. Agarwal et al. (2011) build an index
including board and ownership attributes and find that international institutional investment leads to
improvements in firm governance. Chouchene (2010) shows that institutional investor activism has a
positive impact on the presence of independent directors in French firms. The study published by
Millet-Reyes and Zhao (2010) underlines the ownership concentration of French firms, with founding
individuals and banks being entrenched blockholders. The authors provide evidence that French
institutional owners behave as insiders when firms have two-tier board structures.
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Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
3) Sample description
The sample used for this paper started with all newly listed French firms on Euronext Paris
between 2004 and 2009. Sixty five French firms had their IPO during this period but the sample was
reduced to 51 companies because of missing financial information for year 2004. Financial and
ownership information was obtained from the Bloomberg database. Newly traded firms came from 12
industry segments with 31 companies concentrated in three sectors: electrical equipment, motor
vehicles, and health services.
Table 1 provides a summary of ownership characteristics in 2009. The category “Individual/Family
Ownership” includes shareholdings by all physical persons. The category “Total Institutional
Ownership” is the sum of French (domestic) and foreign institutional shareholdings. This category
includes banks, insurance companies, mutual funds and pension funds. The category “Employee
Ownership” is based on reported shareholdings for the firm’s employee fund. Most newly traded firms
do not have employee ownership. This sample of French IPOs provides a significant contrast with the
data used in most international studies which usually concentrate on the largest French firms of the
CAC40, the main French stock index. However, in a recent study of the interaction of ownership and
board structures in France, Millet-Reyes and Zhao (2010) used a sample of smaller companies. In
their paper, the authors used 174 firms traded on the smaller compartment of the Paris Bourse
(Second Marche). The Paris Bourse became Euronext Paris in 2000. By contrast, this new sample
includes 27 firms traded on Euronext largest compartments (A and B), and 24 firms traded on
compartment C.
Table 1 shows that Individual/Family ownership is much lower in this new sample: the median is 0.4%
as opposed to 57.1% in the previous study. Also, the median French institutional ownership is now
9.9% (versus 0% in the previous sample) and foreign institutional ownership is 4.9% (as opposed to
0% previously). These ownership characteristics indicate that institutional investors play an increasing
role in the corporate structure of new French companies.
Table 1: Descriptive statistics for ownership variables
Variable
Min 25% Median 75% Max Mean
Individual/Family Ownership %
0
0
0.4
26.9 81.9
17.9
Total Institutional Ownership %
0
7.4
16.6
63.1 94.9
32.3
French Institutional Ownership %
0
1.3
9.9
37.2 92.7
21.3
Foreign Institutional Ownership %
0
0.1
4.9
14.8
84
11.0
Employee Ownership %
0
0
0
0.5
7.2
0.6
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Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
Table 2 provides insightful statistics on the ownership characteristics of the sample based on their
trading compartments. Non parametric tests Wilcoxon tests were used on the two subsamples. Larger
IPOs traded on Euronext A and B (27 firms) have statistically lower Individual/Family ownership.
However, the two categories have similar levels of French institutional ownership. Last, foreign
institutional investors seem to concentrate their shareholdings in larger IPOs traded on compartments
A and B.
Table 2: Ownership characteristics based on Euronext compartments
Euronext Paris compartments
Comp. A or B Comp.C and Fixing
(27 firms)
(24 firms)
Individual/Family Ownership %
Mean
9.0
Median
0.0*
French Institutional Ownership %
Mean
21.9
Median
9.9
Foreign Institutional Ownership %
Mean
16.5
Median
8.2*
*Wilcoxon tests significant at the 5% level
27.9
12.7*
20.7
10.4
4.9
0.3*
Table 3: Descriptive statistics and non-parametric tests based on board types
Variable
Individual Ownership %
Mean
Median
French Institutional %
Mean
Median
Foreign Institutional %
Mean
Median
Sales 2004
Mean
Median
Sales 2009
Mean
Median
Total Assets 2004
Mean
Median
Total Assets 2009
Whole
sample
(51 firms)
Two tier boards
(15 firms)
One-tier boards
(36 firms)
17.9
0.4
11.6
0.3
20.5
2.5
21.3
9.9
35.1
22.3 (*)
15.6
6.8 (*)
11.0
4.9
13.4
5.3
10.1
4.9
712.0
60.9
983.3
13.7 (*)
598.7
77.0 (*)
1044.3
175.6
1449.5
73.1
875.5
188.7
4026.6
116.5
1805.3
37.3 (**)
4932.3
141.8 (**)
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Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
Mean
11101.4
4350.0
13914.5
Median
263.6
263.6
269.9
Net Profit Margin 2004
Mean
0.533
-3.128
2.059
Median
0.059
0.011 (*)
0.087 (*)
Net Profit Margin 2009
Mean
-0.029
-0.658
0.233
Median
0.057
0.015 (*)
0.082 (*)
ROA 2004
Mean
0.026
-0.118
0.086
Median
0.030
0.004 (*)
0.051 (*)
ROA 2009
Mean
0.068
-0.066
0.124
Median
0.032
0.004 (*)
0.045 (*)
Debt ratio 2004
Mean
0.598
0.587
0.603
Median
0.623
0.566
0.663
Debt ratio 2009
Mean
0.600
0.524
0.632
Median
0.577
0.531
0.578
(*) Wilcoxon test significant at the 5% level. (**) significant at the 10% level
Table 3 provides the mean (first line) and median (second line) of selected financial and
ownership variables. It covers the whole sample as well as each board category (one-tier and twotier). Non-parametric (Wilcoxon) tests were used to indicate statistical differences between the two
board categories. IPOs with two-tier board structures have significantly higher French institutional
ownership. The median is 22.3% as opposed to 6.8% for unitary board structures. These firms were
also significantly smaller in size in 2004 before their IPOs (as measured by Sales and Total Assets)
but were not statistically smaller in 2009 after their IPOs. Two profitability ratios (ROA and net profit
margin) indicate that two-tier IPOs had lower performance from 2004 to 2009. This may be explained
by rapid expansion in assets and revenue that was not supported by higher profit levels. Industry
characteristics may also play a role in these differences: the sample includes 12 industry segments,
with two-tier firms coming from 6 industry segments. Regression analysis will control for these
differences with industry dummies.
4) Hypotheses and regression analysis
This paper investigates the role played by institutional owners in firms that were recently
publicly traded. The hypothesis tested in this section is that institutional investors select firms in which
they can play a more active role as opposed to other minority shareholders. The existing literature on
corporate governance suggests that board structure should have a significant impact on the level of
institutional shareholdings. Additional variables are used in the model to control for past financial
performance and stock market characteristics. The first regression model used in this section is:
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Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
Instit = a + b1*board + b2*debt + b3*ROA + b4*profit + b5*market+ e
(equation 1)
Where:
Instit= % of Total Institutional Ownership in 2009
Board= 1 for one-tier boards (board=0 for two-tier)
Debt= (Total debt / Total assets) in 2004
ROA = (Net Income/ Total Assets) in 2004
Profit = (Net Income/Sales) in 2004
Market = 1 when Euronext compartment is A or B (comp=0 otherwise)
The second set of regression models differentiates between French and foreign institutional
ownership. The hypothesis is that French corporate ownership has always included banks and
financial institutions as monitors and insiders. Their role should be different from foreign institutional
investors who are often passive minority shareholders. Two regression models are used:
French = a + b1*board + b2*debt + b3*ROA + b4*profit + b5*market+ e
(equation 2)
Foreign = a + b1*board + b2*debt + b3*ROA + b4*profit + b5*market+ e
(equation 3)
Where:
French= % of French institutional ownership
Foreign = % of foreign institutional ownership
Regression results for equations 1,2 and 3 are reported in table 4. Industry dummies were included in
all models but are not reported. First, R-squares for the three models indicate that the model fit is
good, with values ranging from 26% to 34%. Second, the three equations generate significantly
different results. In the first model which pools French and foreign institutional ownership, three
coefficients appear to be statistically significant: the board dummy, the market dummy, and profit
margin. The results of equation 1 indicate that institutional ownership is higher in two-tier board
structures and in firms that trade on the larger Euronext compartments. The only significant coefficient
linked to financial variables is the positive coefficient for profit margin. The debt variable improved the
overall fit of the model but was not statistically significant. However, significant differences appear
when French and foreign institutional shareholdings are isolated.
Regression results for equation 2 generate similar but stronger results than equation 1, with the
coefficient for profit margin and ROA being statistically significant at the 5% level. Although the profit
margin coefficient is positive, table 3 showed that French institutional ownership was concentrated in
two-tier structures with low financial performance. Aste (1999) underlines the advantages of two-tier
boards in reforming the French governance system. The clear delineation between the supervisory
and management boards, and the small size of the directorate should promote efficient decision
making. However, the author also acknowledges that the choice of a two-tier board structure is often
based on political as opposed to economic reasons, with entrenched directors misusing their role as
insiders. The results of equation 2 are consistent with the findings of Millet-Reyes and Zhao (2010)
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Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
who report a negative impact of entrenched French institutional investors on operating performance
(as measured by ROA) when firms have a two-tier board structure. The authors conclude that French
financial institutions are more likely to promote interlocked directorship, board opacity, and their own
interests as creditors in this context. They only play a positive role as monitors in unitary board
structures. Although family ownership is now very low in newly traded firms (as reported in table 1),
agency conflicts seem to be generated by insiders such as institutional investors.
Equation 3 also shows that board characteristics and past financial performance do not have an
impact on the level of foreign institutional shareholdings. The only significant variable is the market
dummy, indicating that foreign investors require higher liquidity and firm size. It also supports the
hypothesis that they behave as passive minority shareholders.
Table 4: OLS regression results for equations 1,2 and 3
Variable
Intercept
Board
Debt
ROA
Profit
Comp
Instit (eq. 1)
(R-sq.=.29)
39.23*
(0.00)
-20.15*
(0.03)
-1.46
(0.84)
-58.69
(0.13)
1.59**
(0.10)
16.70*
(0.03)
French (eq.2) (Rsq.= .34)
33.00*
(0.00)
-15.60*
(0.05)
-2.81
(0.64)
-74.23*
(0.03)
1.98*
(0.02)
7.34
(0.26)
Foreign (eq.3) (Rsq.=.26)
6.23 (0.26)
-4.55
(0.41)
1.35
(0.75)
15.55
(0.50)
-0.40
(0.49)
9.36*
(0.02)
*indicates significance at the 5% level. ** significance at the 10% level
5) Conclusion
This empirical study concentrates on the significance of institutional ownership in French IPOs. France
provides a unique corporate environment because of the interdependence of governance tools such
as board characteristics and ownership concentration. Sample statistics show that French institutional
ownership dominates in two-tier board structures. Individual and family shareholdings have almost
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Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
disappeared from newly traded French firms. Regression results validate the hypothesis that financial
institutions behave as entrenched investors who do not maximize shareholders’ interests. Their
shareholdings are correlated with lower profit margins and ROA. By contrast, foreign institutional
investors behave as minority shareholders concentrating on stock market liquidity and visibility. These
results suggest that historical links with French financial institutions may still dominate corporate
governance mechanisms in newly traded firms.
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