Three essays on ownership structure and firm focus: The impact of ownership structure on the corporate sell-off decision; The long term impact on the firm from large sell-offs; The relationship between ownership structure, firm focus, and Tobin's Q.

Abstract

Three essays relating to ownership structure and firm focus are presented. The first study analyzes the relationship between ownership by officers and directors and the corporate sell-off decision. The relationship is formalized in a simple theoretical model; the analysis suggests a negative relationship between the sell-off decision and the extent of both director ownership and officer and director ownership, and it implies a positive relationship between the sell-off decision and both officer and institutional ownership. Empirical results show a significant negative relationship between the probability of a sell-off and the level of director and officer and director ownership. The second study investigates the long run impact on firms that sold-off large assets in 1986 and 1987. Previous research implies firm performance should improve for sell-off firms relative to nonsell-off firms and debt should fall for sell-off firms relative to nonsell-off firms. The empirical results are supportive of these expectations. The third study empirically models Tobin's Q. Previous research in finance argues value is dependent on ownership structure through an alignment effect and an entrenchment effect. The alignment effect claims that as inside ownership increases, the interests of inside and outside owners are aligned which encourages decision making that maximizes the firm's value. The entrenchment effect argument reasons that insiders are monitored by the threat of a takeover. As the ownership of insiders increases this threat diminishes and thus decision making may tend to be directed toward maximizing decision makers welfare. Economics and Strategic Management attribute value to the composition of assets and the level of firm focus. A firm may create value by diversifying for synergy reasons; however, an overdiversified firm may also be a function of managerial objectives. The two separate arguments are retested using inside ownership and a diversification index. Inside ownership is found to be significantly positively related to Q over the range 0% to 5%. The diversification index is found to be significantly negatively related to Q. When both effects are included in a model of Q, they are each statistically significant with appropriate signs on the coefficient estimates.