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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.

With a controlling owner, the classical principal agent dilemma between owner and management is not a major problem. Instead, there is a conflict of interest between the controlling and minority shareholders. As the controlling owner holds less than all of the cash flow rights, each benefit that is privately enjoyed by the controlling owner is not paid for in full by him and is thereby a personal gain on his behalf, a private benefit of control. As the differential between control rights and cash flow rights decreases, the cost of using the control for such private benefits, rather than for shareholder value maximisation, decreases.

Investment Efficiency on the Margin

The definition of inefficient investment used in this thesis is based on the point of view of value maximisation of the company as a whole, rather than maximising the value accruing to specific shareholders. It is measured by whether or not capital is invested at a rate of return equal to or higher than the company’s cost of capital. But in order to measure the efficiency of investment a new methodology is used, marginal q. This methodology has great similarities with the classical Tobin’s q, but rather than measuring the effect of all investment decisions still in effect in a given company, it measures the investment efficiency relating to the existing controlling shareholder on the margin.

Evidence will be shown in this thesis for inefficient investment decision-making in family-controlled Swedish companies. Also, strong arguments will be provided, in terms of theoretical and empirical findings, to suggest that the agency costs involved predominantly relate to non-pecuniary private benefits of control, such as overinvestment, rather than pecuniary private benefits of control, i.e. expropriation of minority shareholders.

The purpose of this study is to investigate if ownership structure and/or type of owner affect the investment efficiency of a firm, more specifically Swedish firms from 1986 to 2003.

The foremost measure of agency costs used so far has been Tobin’s q, resulting in findings that indicate that firms controlled by minority shareholders and/or by owners that prefer control to returns, trade at a discount to other companies. However, very little has been put forward to explain this discount more specifically. The contribution of this thesis is the use of a more recently developed method, marginal q, to measure and explain agency costs in Sweden. The method permits an estimation of investment efficiency on the margin, rather than across the entire historical investment decisions of a firm, creating a stronger link with the current control structure and predicted agency costs.

If evidence is found in this study that firms controlled by types of owners and/or control structures associated with agency costs invest inefficiently in relation to other firms, that would go a long way to explain previous empirical findings. Furthermore, applying marginal q to Swedish data, a country ripe with control structures that separate voting from cash flow rights and an empirically established bias towards owners that prefer control to returns, contributes not only towards explaining previous empirical findings in regards to Sweden, but should also constitute a valuable contribution in an international setting.


The Tobin’s Q measure (average q), first introduced in Brainard and Tobin (1968) and Tobin (1969), or most often a proxy for it, has been the traditional method for measuring investment efficiency. Although it might be an appropriate way to measure the value of a firm’s assets inside the company relative to their replacement costs, and thereby the overall investment efficiency of the firm, it is a blunt instrument for measuring investment efficiency on the margin. In effect, it evaluates all investment decisions still in effect ever taken by the firm.

A more appropriate method to measure investment efficiency in relation to corporate governance, and more specifically ownership structure, is marginal q. It measures the efficiency of investments taken by the company by relating the increase in market value of the firm to investments made during a given time period. Consequently, it evaluates decisions of current controlling owners and/or management, rather than relating aggregate, historical and current, returns to current decision makers. According to Gugler and Yurtoglu (2003) there are three additional technical advantages with marginal q in this setting.

i) Endogeneity is not likely to be a problem. Besides providing a more accurate measure of investment efficiency, marginal q also reduces endogeneity. Low average q for companies with a large difference between voting and capital rights does not necessarily mean that the owners are making poor investment decisions, since it could also be the result of them reducing their capital stake based on inside information regarding the firm’s outlooks. A lower marginal q for high voting difference companies, however, means that the controlling shareholders are making poor investment decisions on the margin.

ii) It is not necessary to calculate the cost of capital for a company. As will be described below, it is only necessary to calculate the ratio between investment return and cost of capital, i.e. marginal q.

iii) The method allows for different degrees of risk between companies. Any investments made must give a sufficient return in relation to risk, otherwise the market value will increase with a lower amount than what was invested, which in turn will result in a relationship between returns and cost of capital lower than one.

Thesis Done by Lars Schöldström and Karl-Johan Wattsgård, Stockholm School of Economics

Reference :

Stockholm School of Economics