Abstract
In spite of the fact that most research has concentrated on the typical
agency problem between managers and dispersed shareholders, in many
countries large shareholders are much more frequently observed than
firms with dispersed ownership structures. While large shareholders
are perceived as a potential solution to the typical agency problem
between managers and dispersed shareholders, less research has been
done on the costs of large shareholders. One important issue in this
literature is that deviations of cash flow rights from voting rights
often result in substantial value discounts. In this paper we test
for the impact of such deviations on corporate investment performance
in Turkey. To measure corporate investment performance we estimate
returns on investment relative to company costs of capital, a methodology
that overcomes the endogeneity problem, which is known to contaminate
results in the empirical corporate governance literature. Consistent
with existing studies, we find that the average Turkish listed company
has a return on investment which is less than its cost of capital.
We also report significantly better investment performance for companies
that do not deviate from one share-one vote by using pyramidal ownership
structures, dual-class shares and other devices that enhance the
control power of large shareholders beyond their cash flow rights.
We also find that business group membership improves the investment
performance and relative market valuation of companies. © 2006 Blaekwell
Publishing Ltd.
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