The Impact of family ownership and dual class shares on takeover risk

<strong>The</strong> <strong>Impact</strong> <strong>of</strong> <strong>family</strong> <strong>ownership</strong> <strong>and</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> on takeover riskFORTHCOMING APPLIED FINANCIAL ECONOMICSMARTIN HOLMÉN <strong>and</strong> EUGENE NIVOROZHKINDepartment <strong>of</strong> Economics, Uppsala University, Box 513, SE-751 20 Uppsala, Sweden, <strong>and</strong>SSEES, University College London, Gower Street, London WC1E 6BT, UKIn this paper we explore the relation between the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> the risk <strong>of</strong> takeovers. Ourresults stress the need to control for the identity <strong>of</strong> the controlling owner in studies <strong>of</strong> corporate control<strong>and</strong> firm performance. For <strong>family</strong> controlled firms, we find that both the hazard rate <strong>of</strong> takeover <strong>and</strong>firm market value decline with the wedge between the families’ voting rights <strong>and</strong> cash flow rights. Weconclude that due to non-transferable private benefits <strong>of</strong> control in <strong>family</strong> firms, <strong>dual</strong> <strong>class</strong> <strong>shares</strong>reduce the likelihood that the <strong>family</strong> will accept the terms <strong>of</strong> value enhancing takeovers <strong>and</strong> thistranslates into lower firm value.

I. INTRODUCTIONRecent financial research has examined the frequency <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong>, how <strong>dual</strong> <strong>class</strong><strong>shares</strong> affect firm market value, <strong>and</strong> the relation between private benefits <strong>of</strong> control <strong>and</strong> theuse <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong>. 1 La Porta et al. (1999), Claessens et al. (2000), <strong>and</strong> Faccio <strong>and</strong> Lang(2002) show that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> are common in many countries. Claessens et al. (2002)document that separation <strong>of</strong> <strong>ownership</strong> from control, such as from <strong>dual</strong> <strong>class</strong> <strong>shares</strong>, isassociated with lower firm market values. Bebchuk et al. (2000) theoretically show how <strong>dual</strong><strong>class</strong> <strong>shares</strong> <strong>and</strong> other mechanisms that separate <strong>ownership</strong> form control, such as pyramids<strong>and</strong> cross-holdings, increase the potential for private benefits <strong>of</strong> control. However, Dyck <strong>and</strong>Zingales (2004) show that proxy measures for the private benefits <strong>of</strong> control tend to be lowerin countries where <strong>dual</strong> <strong>class</strong> are common. <strong>The</strong>refore, the reason for a negative relationbetween the presence <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> firm market value remains an empiricalquestion.Grossman <strong>and</strong> Hart (1988) argue that “…the main impact <strong>of</strong> a firm’s security-votingstructure will be in its influence on the market for corporate control…”. <strong>The</strong>y theoreticallyshow that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> can reduce the likelihood <strong>of</strong> efficiency improving takeovers <strong>and</strong>argue that this reduced likelihood translates into lower firm market value. As far as we knowthe influence <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> on the market for corporate control has not been empiricallyanalyzed in detail. 2 In this paper, we examine the impact <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> on the Swedishmarket for corporate control.Sweden provides an advantageous venue to explore the impact <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> ontakeover activity <strong>and</strong> firm market value. In La Porta et al.’s (1999) examination <strong>of</strong> the 27richest countries in the world, Sweden ranks first in the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong>. Swedishfirms typically issue two types <strong>of</strong> <strong>shares</strong>, A-<strong>shares</strong> that are one share – one vote <strong>and</strong> B-<strong>shares</strong>that typically carry 1/10 <strong>of</strong> a vote per share. Furthermore, empirical studies that attempt to1

measure the private benefits <strong>of</strong> control generally find that the private benefits <strong>of</strong> control inSweden are among the lowest in the world (see C<strong>of</strong>fee, 2001; Nenova, 2003; Dyck <strong>and</strong>Zingales, 2004). However, Cronqvist <strong>and</strong> Nilsson (2003) find that firms with <strong>dual</strong> <strong>class</strong> <strong>shares</strong>are valued at a discount. Finally, Holmen <strong>and</strong> Högfeldt (2004) show that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> areespecially common among <strong>family</strong> firms in Sweden. Thus, <strong>dual</strong> <strong>class</strong> <strong>shares</strong> are common inSweden, especially among <strong>family</strong> firms, they do not appear to be associated with substantialpecuniary private benefits <strong>of</strong> control, but they appear to be associated with lower firm marketvalue. Given these results, the question naturally arises whether there are more to <strong>dual</strong> <strong>class</strong><strong>shares</strong> than mere extraction <strong>of</strong> pecuniary benefits? <strong>The</strong> main contribution <strong>of</strong> our study isfilling this void.Based on Grossman <strong>and</strong> Hart (1988) we outline <strong>and</strong> test two questions about <strong>dual</strong><strong>class</strong> <strong>shares</strong> <strong>and</strong> the market for corporate control. First, does an increased wedge between thecontrolling owner’s voting rights <strong>and</strong> cash flow rights decrease the likelihood <strong>of</strong> a non-partialtakeover? Second, is a negative relation between the wedge between voting rights <strong>and</strong> cashflow rights <strong>and</strong> takeover risk stronger in <strong>family</strong> controlled firms? If the incumbent deriveslarger private benefits than the bidder, a wedge between the incumbent’s number <strong>of</strong> votingrights <strong>and</strong> cash flow rights will reduce the likelihood <strong>of</strong> a successful takeover, ceteris paribus.<strong>The</strong> incumbent will derive larger private benefits if some <strong>of</strong> the benefits <strong>of</strong> control are nontransferableto the bidder. Generally, we hypothesize that <strong>family</strong> firms are associated withmore non-transferable private benefits <strong>of</strong> control.Our third research question concerns leverage <strong>and</strong> the market for corporate control.Dual <strong>class</strong> <strong>shares</strong> is not the only way for controlling shareholders to increase their votingrights in order to hinder successful tender <strong>of</strong>fers. Stulz (1988) points out that debt can be usedas a device that allows current owners to retain control <strong>of</strong> their firm. If the corporate charterdoes not allow <strong>dual</strong> <strong>class</strong> <strong>shares</strong> it may be easier for a large shareholder to increase his control2

<strong>of</strong> voting rights by increasing firm leverage than by changing the corporate charter. Thus,does increased firm leverage decrease the likelihood <strong>of</strong> a successful non-partial takeover?Family firms are likely to have greater incentives to use higher leverage as an anti-takeoverdevice because <strong>of</strong> the desire <strong>of</strong> <strong>family</strong> members to protect their firm-specific human capital<strong>and</strong> <strong>family</strong>-specific private benefits <strong>of</strong> control such as the ability to hire relatives, the abilityto transfer firm to heirs <strong>and</strong> the aspiration to enhance <strong>family</strong> name (DeAngelo & DeAngelo,1985; Anderson et al., 2003; Denis <strong>and</strong> Denis, 1994). 3 Family firms’ incentives to use higherleverage could also be enhanced by the lower cost <strong>of</strong> debt financing relative to non-<strong>family</strong>firms (Anderson et al., 2003). We therefore expect that a negative relation between leverage<strong>and</strong> takeover probability is stronger for <strong>family</strong> controlled firms.Other researchers have examined the probability <strong>of</strong> Anglo-Saxon firms being takenover. 4 Many Anglo-Saxon studies explicitly investigate the impact <strong>of</strong> the <strong>ownership</strong> structure<strong>of</strong> the firm on the likelihood <strong>of</strong> being taken over. 5However, equity <strong>ownership</strong> cannotdiscriminate between the alignment <strong>of</strong> interest effect, which increases the probability that thecontrolling owner will accept a takeover bid involving a premium, <strong>and</strong> entrenchment effects,which decrease the probability that the controlling owner will relinquish control. By includingthe controlling owner’s equity fraction as a proxy for incentive effects <strong>and</strong> the fraction <strong>of</strong>voting rights in excess <strong>of</strong> cash flow rights as a proxy for entrenchment effects we extendearlier work on the relation between <strong>ownership</strong> structure <strong>and</strong> probability <strong>of</strong> takeovers (seeClaessens et al., 2002).Furthermore, little is known about takeover probability <strong>and</strong> the impact <strong>of</strong> <strong>ownership</strong>structure on the likelihood <strong>of</strong> being taken over outside the Anglo-Saxon countries. <strong>The</strong>concentrated <strong>ownership</strong> structure <strong>of</strong> firms in other countries is very different from the typicaldispersed <strong>ownership</strong> structure in the U.S. <strong>and</strong> the U.K. (La Porta et al., 1999). Typically,firms outside the Anglo-Saxon countries have a controlling shareholder, <strong>of</strong>ten a <strong>family</strong> that3

can block any takeovers attempts if the owner does not accept the terms <strong>of</strong> the bid. 6 Thisstudy will explore how <strong>family</strong> control impacts the likelihood <strong>of</strong> the firm being taken over.Most <strong>of</strong> the existing financial economics literature on the likelihood <strong>of</strong> being takenover relies on binary choice models. We take another approach <strong>and</strong> estimate hazard rate <strong>of</strong> thetakeover event. This has been done in the industrial organization literature by Dickerson et al.(2002) <strong>and</strong> in the statistical literature by Jaggia <strong>and</strong> Thosar (1995) but as far as we know notin the financial economics literature. We use panel data where a majority <strong>of</strong> the firms are nottaken over during our sampling period. <strong>The</strong> hazard function approach allows us to investigatewhether, given that a firm has not been taken over up to a certain point, changes in particularcharacteristics (e.g. <strong>ownership</strong>) <strong>of</strong> the firm will lead to a takeover event.We use an unbalanced panel <strong>of</strong> 200 large Swedish non-financial firms listed on theStockholm Stock Exchange 1985-2000. <strong>The</strong> sample contains 1706 firm years. On averageabout 70 percent <strong>of</strong> the Swedish stock market capitalization is included in the sample eachyear. 47 firms were subject to successful non-partial tender <strong>of</strong>fers. 7Our main results are as follows. First, <strong>family</strong> controlled firms have a higher hazardrate <strong>of</strong> takeover. Second, for <strong>family</strong> controlled firms the hazard rate <strong>of</strong> takeover issignificantly reduced by the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> firm leverage. Furthermore, we runfixed effects regression models with firm value as dependent variable. Firm value isapproximated by Tobin’s q. <strong>The</strong> results are remarkably similar to the estimated hazard rates.Family control per se is associated with higher Tobin’s q. However, the value <strong>of</strong> <strong>family</strong> firmsis significantly reduced by the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> firm leverage.Given that the proxies for pecuniary private benefits are small in Sweden, we concludethat <strong>family</strong>-owners’ consumption <strong>of</strong> non-transferable <strong>and</strong> non-pecuniary benefits (‘‘amenitypotential’’ 8 ) is a likely explanation for our results, even though extraction <strong>of</strong> pecuniarybenefits cannot be rules out. An increase in the wedge between voting rights <strong>and</strong> cash flow4

ights reduces the likelihood that the <strong>family</strong> will accept a value enhancing takeover bid.<strong>The</strong>refore, a wedge between voting rights <strong>and</strong> cash flow rights translates into lower firmmarket value (see Grossman <strong>and</strong> Hart, 1988). Thus, it is not necessarily the consumption <strong>of</strong>private benefits per se that reduces firm market value. Another possibility is that it is thereduced likelihood <strong>of</strong> value enhancing takeovers associated with <strong>dual</strong> <strong>class</strong> <strong>shares</strong> that drivesthe negative relation between <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> firm market value. Similar arguments canbe made for the negative relation between leverage <strong>and</strong> reduced likelihood <strong>of</strong> takeovers <strong>and</strong>firm value, respectively, for <strong>family</strong> firms (Stulz, 1988).Our results are related to Claessens et al.’s (2002) results for East Asian firms. <strong>The</strong>ydocument that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> are associated with lower firm market values <strong>and</strong> interpretthis in terms <strong>of</strong> entrenchment. Similarly for Sweden, Cronqvist <strong>and</strong> Nilsson (2003) documentthat controlling minority shareholders, who rely on <strong>dual</strong> <strong>class</strong> <strong>shares</strong>, are associated withworse firm performance. <strong>The</strong>y argue that this is partly driven by the fact that <strong>dual</strong> <strong>class</strong> <strong>shares</strong>let the controlling shareholder hang on to control too long. Our results suggest that this isindeed the case.This paper is also related to the growing empirical literature on how <strong>family</strong> controlmay affect firm behavior <strong>and</strong> firm performance. Anderson <strong>and</strong> Reeb (2003a) document thatfounding <strong>family</strong> <strong>ownership</strong> improves firm performance. However, mounting evidenceindicates that when the firm is controlled by the founders’ descendents firm performancedeclines significantly (see Morck et al., 2000; Perez-Gonsalez, 2002; Fahlenbrach, 2004; <strong>and</strong>Hillier <strong>and</strong> McColgan, 2004). 9Villalonga <strong>and</strong> Amit (2004) find that <strong>dual</strong> <strong>class</strong> <strong>shares</strong>,pyramids <strong>and</strong> voting agreements reduce the founder premium. In the light <strong>of</strong> this research,one plausible interpretation <strong>of</strong> our results is that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> reduce the risk <strong>of</strong> takeovers<strong>and</strong> facilitate for founders to let less suited descendents inherit the firm. This interpretation5

would be consistent with the negative relation between the risk <strong>of</strong> takeover <strong>and</strong> firm value,respectively, <strong>and</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong>.Our results are also related to the literature on the size <strong>of</strong> the private benefits <strong>of</strong>control. Empirical studies that attempt to measure the private benefits <strong>of</strong> control generallyfind that the private benefits <strong>of</strong> control in Sweden are among the lowest in the world (seeC<strong>of</strong>fee, 2001; Nenova, 2003; Dyck <strong>and</strong> Zingales, 2004). Morck et al. (2004) argue thatentrenchment must stem from private benefits <strong>of</strong> control, i.e. if there are no private benefits <strong>of</strong>control the controlling shareholder has no incentives to entrench himself. Our results indicatethat the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> entrench Swedish families. <strong>The</strong> voting premium (Nenova,2003) <strong>and</strong> the premium paid in negotiated control block transfers (Dyck <strong>and</strong> Zingales, 2004)most likely capture pecuniary private benefits <strong>of</strong> control. <strong>The</strong> pecuniary private benefits inSweden are probably small due to high accounting st<strong>and</strong>ards, tax compliance, <strong>and</strong> juridicalst<strong>and</strong>ards. Furthermore, pecuniary private benefits should to a large extent be transferable tothe bidder, i.e. the bidder should be willing to pay for pecuniary private benefits. If the privatebenefits associated with the controlling block were completely transferable it would be lesslikely that we would find a negative relation between takeover risk <strong>and</strong> the use <strong>of</strong> <strong>dual</strong> <strong>class</strong><strong>shares</strong>. We therefore interpret our results in terms <strong>of</strong> entrenchment stemming from nontransferableprivate benefits <strong>of</strong> control such as status, political influence, <strong>and</strong> power overpeople.<strong>The</strong> rest <strong>of</strong> the paper is organized as follows. <strong>The</strong> next section outlines our hypotheses<strong>and</strong> the sample selection process. <strong>The</strong> data <strong>and</strong> the variable definitions are also presented inthe next section. Section 3 outlines the methodology used when hazard rates are estimated. Insection 4 we report our empirical results in terms <strong>of</strong> hazard rates <strong>of</strong> takeovers <strong>and</strong> firmperformance. Section 5 summarizes <strong>and</strong> concludes.6

II. HYPOTHESES AND DATAIn this section we first outline our hypotheses. We then discuss the sample selection process<strong>and</strong> compare our sample to the population <strong>of</strong> takeovers on the Stockholm Stock Exchange. Inpart C we provide descriptive statistics.A. Hypotheses<strong>The</strong> total value <strong>of</strong> the firm is the value <strong>of</strong> cash flow rights <strong>and</strong> the value <strong>of</strong> the private benefits<strong>of</strong> control. If a bidder can increase the value <strong>of</strong> the cash flow rights <strong>and</strong> the private benefits <strong>of</strong>control can be transferred from the incumbent to the bidder, the bidder can make an <strong>of</strong>fer thatthe incumbent will accept. <strong>The</strong> incumbent will be compensated for the lost private benefits <strong>of</strong>control. However, if the private benefits are not transferable to the bidder, at least notcompletely, it is no longer evident that the bidder can make on <strong>of</strong>fer the incumbent will accept(see Grossman <strong>and</strong> Hart, 1988).In order to develop a testable hypothesis we make three main assumptions. First, inline with Grossman <strong>and</strong> Hart (1988) we assume that only one party at a time can derivesubstantial private benefits <strong>of</strong> control. Second, we assume that the private benefits are relatedto the largest control block in the firm, i.e. the largest voting block. 10 Third, we assume thatnot all private benefits are transferable to the bidder. This resembles the case discussed byGrossman <strong>and</strong> Hart (1988) where the incumbent derives more private benefits than the bidder.<strong>The</strong>n, even if the bidder can increase the value <strong>of</strong> the cash flow rights, the incumbent will notaccept a takeover bid as long as his net loss <strong>of</strong> private benefits exceeds the premium thebidder <strong>of</strong>fers to pay on the incumbent cash flow rights. <strong>The</strong> net loss is the value <strong>of</strong> the privatebenefits to the incumbent minus the price the bidder is willing to pay for them. Grossman <strong>and</strong>Hart (1988) show that the willingness <strong>of</strong> the incumbent to accept a takeover bid declines witha decrease in cash flow rights attached to the controlling voting block. In other words, given a7

certain incremental increase in the value <strong>of</strong> each cash flow right, the fewer cash flow rightsthe incumbent owns, the less likely will this increase compensate the incumbent for theprivate benefits that the bidder is not willing to pay for, i.e. non-transferable private benefits. 11This is the motivation for our main hypothesisHypothesis 1: <strong>The</strong> larger the wedge between the controlling shareholder’s <strong>ownership</strong> <strong>of</strong>voting rights <strong>and</strong> cash flow rights, the lower the hazard rate <strong>of</strong> takeover.One should note that our hypothesis is based on the assumption that some <strong>of</strong> the privatebenefits are non-transferable. If the bidder would derive as much private benefits as theincumbent, he could compensate the incumbent for the lost private benefits <strong>and</strong> all efficiencyimproving takeovers would go through. Private benefits such as status, prestige, socialst<strong>and</strong>ing <strong>and</strong> political influence are probably difficult to transfer, at least completely. Forexample, the status associated with having a large listed firm carrying the <strong>family</strong> name isprobably not transferable to someone outside the <strong>family</strong> (see Barclay et al., 1993). Generally,we assume that the non-transferable benefits <strong>of</strong> control should be larger in <strong>family</strong> controlledfirms. <strong>The</strong>refore, a wedge between voting rights <strong>and</strong> cash flow rights should reduce the risk <strong>of</strong>takeover more in <strong>family</strong> firms than in non-<strong>family</strong> firms, ceteris paribus.Hypothesis 2: A negative relation between the wedge between voting rights <strong>and</strong> cash flowrights <strong>and</strong> takeover risk will be stronger for <strong>family</strong> controlled firms.B. Sample SelectionWe start with an unbalanced panel dataset containing accounting data for 211 large nonfinancialSwedish firms listed on the Stockholm Stock Exchange1985-2001. <strong>The</strong> accounting8

data is collected from the Findata Trust database. <strong>The</strong> sample contains the vast majority <strong>of</strong> thelargest non-financial public firms during this time-period. Some large firms that were onlylisted for one or two years before delisting are not included in the sample.<strong>The</strong> accounting data is combined with <strong>ownership</strong> data from Sundqvist (1985-1993)<strong>and</strong> Sundin <strong>and</strong> Sundqvist (1994-2001). This source reports the 25 largest owners in all listedfirms as <strong>of</strong> January each year. After the collection <strong>of</strong> <strong>ownership</strong> data the sample is reduced to200 firms <strong>and</strong> 1706 firm years.A first rough estimate <strong>of</strong> takeover activity is also collected from Sundin <strong>and</strong> Sundqvist(1986-2001) since they report all delistings. However, they do not distinguish between actualtakeovers, minority buyouts, <strong>and</strong> going private transactions. We are only interested intransactions where there has been a change in control, i.e. not the minority buyouts <strong>and</strong> goingprivate transactions. To separate going private transactions from actual takeovers we use dailynewspapers. 12 We also examine the <strong>ownership</strong> structure <strong>of</strong> the firm the years preceding thedelisting. If a firm is delisted in year t after a successful non-partial tender <strong>of</strong>fer <strong>and</strong> theinvestor making the tender <strong>of</strong>fer was not the largest voteholder in the beginning <strong>of</strong> year t-1 wedefine the event as a successful non-partial takeover. If the investor making the tender <strong>of</strong>ferwas the largest voteholder in the beginning <strong>of</strong> year t-1 we define the event as a going privatetransaction, not as a takeover.In Sweden, almost all non-partial takeovers are preceded by a public tender <strong>of</strong>fer(Bergström <strong>and</strong> Rydqvist, 1989). According to Swedish law, any shareholder or group <strong>of</strong>shareholders in the target, who has 10% <strong>of</strong> the <strong>shares</strong>, can block a merger. <strong>The</strong>refore, theterms <strong>of</strong> the tender <strong>of</strong>fer are <strong>of</strong>ten negotiated between the bidder <strong>and</strong> the large shareholders <strong>of</strong>the target before the public announcement. When the large blockholders have accepted theterms <strong>of</strong> the bid, a follow-up tender <strong>of</strong>fer is made for all target <strong>shares</strong>, including theblockholders’ <strong>shares</strong> (Rydqvist, 1993). Most bids are non-partial <strong>and</strong> are contingent upon9

90% <strong>of</strong> the shareholders accepting the <strong>of</strong>fer. <strong>The</strong> fact that we only look at successfultakeovers suggests that all takeovers in our sample are friendly.Thus, our hypotheses are not based on the argument that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> hinderhostile takeovers since hostile takeovers could in principle be blocked already at 10 percent <strong>of</strong>firm equity. <strong>The</strong> average controlling shareholder in our sample holds more than 30 percent <strong>of</strong>firm equity. Instead, our hypothesis is based on the assumption that deviations from one share– one vote make it less likely that the bidder will be able to make a friendly bid that theincumbent will accept.<strong>The</strong> bidder is not allowed to discriminate between the controlling shareholder’s <strong>and</strong>the minority shareholders’ low voting stock. However, the bidder can discriminate betweenhigh voting stock, mainly held by the controlling shareholder, <strong>and</strong> low voting stock, mainlyheld by minority shareholders. <strong>The</strong>refore, the bidder can compensate the incumbent for theloss <strong>of</strong> private benefits <strong>of</strong> control. However, if the private benefits are not transferable to thebidder, he will not be willing to pay for them.Our final takeover sample consists <strong>of</strong> 47 successful non-partial takeovers. In our totalsample 24 firms were subject to minority buyouts, three firms went bankrupt <strong>and</strong> one firmwas restructured due to financial distress.Table 1 panel A summarizes our sample. On average our sample contains roughly 100firms each year, <strong>of</strong> which 3 firms are taken over each year. Our sample comprises roughly 70percent <strong>of</strong> the Swedish stock market capitalization. However, column 5 indicates that we onlyinclude roughly 25 percent <strong>of</strong> all successful non-partial takeovers events on the StockholmStock Exchange during this time period. Our sample mainly contains the large firms for whichfinancial statements <strong>and</strong> <strong>ownership</strong> data tend to be more readily available. Since many smallfirms had been acquired during the period <strong>of</strong> investigation the sample coverage <strong>of</strong> takeoverevents is reduced.10

In panel B the frequency <strong>of</strong> non-partial takeovers bids on Stockholm Stock Exchangeis summarized. On average 13 firms are taken over each year. Thus, roughly five percent <strong>of</strong>the firms listed on the Stockholm Stock Exchange are taken over each year. In percentage <strong>of</strong>market value, the number drops to three percent, i.e. three percent <strong>of</strong> the market value on theStockholm Stock Exchange is taken over each year. <strong>The</strong> difference indicates that the typicaltakeover involves a small target firm. In market value terms (column 6 in panel A) our sampleon average comprises more than 50 percent <strong>of</strong> the takeovers on the Stockholm StockExchange during the investigated period.Some big (market value) takeovers are not included in our sample. For example, wedo not include four big takeovers <strong>of</strong> banks in 1990, four big takeovers <strong>of</strong> financial institutionsin 1997, <strong>and</strong> three takeovers <strong>of</strong> highly valued information technology firms in 2000. 13 As faras we know, the only major non-partial takeover <strong>of</strong> a large Swedish non-financial firm listedon the Stockholm Stock Exchange not included in our sample is the takeover <strong>of</strong> Pharmacia bythe U.S. pharmaceutical firm Upjohn in 1995. A restructured Pharmacia was listed in 1993<strong>and</strong> then delisted in 1995. Hence, there is only one year <strong>of</strong> complete accounting data forPharmacia as a listed firm before delisting. <strong>The</strong>refore, Pharmacia was never included in theoriginal sample.C. Descriptive StatisticsIn Table 2 we provide descriptive statistics for the 200 firms <strong>and</strong> 1706 firm years in oursample. <strong>The</strong> median controlling shareholder holds 29 percent <strong>of</strong> the cash flow rights (Equity)<strong>and</strong> almost 50 percent <strong>of</strong> the voting rights (Votes). <strong>The</strong> difference is a result <strong>of</strong> the highfrequency <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong>. 79 percent <strong>of</strong> the firms in our sample have <strong>dual</strong> <strong>class</strong> <strong>shares</strong>(see panel B). On average, the largest shareholder holds 16.6 percent Excess Votes, i.e. votingrights in excess <strong>of</strong> cash flow rights.11

A shareholder could block a takeover by holding 10 percent <strong>of</strong> the votes. If 20 percent<strong>of</strong> the firm’s stock had 10 votes per share <strong>and</strong> the other 80 percent were one-share one-vote,10 percent <strong>of</strong> the votes could be achieved by holding less than three percent <strong>of</strong> the cash flowrights (see Bergström <strong>and</strong> Rydqvist, 1990). Since the median controlling shareholder holds50 percent <strong>of</strong> the votes <strong>and</strong> 29 percent <strong>of</strong> the cash flow rights there are clearly other thingsthan the possibility to block a takeover that influences the controlling owner’s investmentdecision. For example, holding 50 percent or more <strong>of</strong> the votes gives the controllingshareholder full control <strong>of</strong> the firm. 14 Given <strong>dual</strong> <strong>class</strong> <strong>shares</strong>, 50 percent <strong>of</strong> the votes could beachieved with a much smaller investment in cash flow rights than 29 percent. However,Zingales (1990) shows that the controlling owner needs to hold a certain fraction <strong>of</strong> the cashflow rights in order to have incentives to sell the firm when it is efficient to do so. 15 <strong>The</strong>controlling owner must find the optimal balance between voting rights <strong>and</strong> cash flow rights.Thus, the optimal balance is not to minimize the investment in cash flow rights given a certainfraction <strong>of</strong> the voting rights. This balance might also vary with <strong>ownership</strong> <strong>and</strong> firmcharacteristics.<strong>The</strong> median firm has assets with a book value <strong>of</strong> 1525 million SEK (Size), is 47 yearsold (Age), invests an amount equal to 8.5 percent <strong>of</strong> total assets (Investment), generates areturn <strong>of</strong> 12.4 percent return on total assets (Pr<strong>of</strong>itability), has financed 23.7 percent <strong>of</strong> totalassets with long term debt (Leverage), has 56.4 percent <strong>of</strong> total assets in short term assets(Liquidity), <strong>and</strong> has a Tobin’s q <strong>of</strong> 1.146. Tobin’s q is defined as the sum <strong>of</strong> the market value<strong>of</strong> equity <strong>and</strong> book value <strong>of</strong> total debt divided by the book value <strong>of</strong> total assets. 16<strong>The</strong> sample is split by whether the firm was subject to a successful non-partial tender<strong>of</strong>fer 1985-2000 (47 firms). All firm years (N=425) prior to the successful non-partialtakeover are <strong>class</strong>ified as belonging to a takeover target. <strong>The</strong> median difference test suggeststhat the controlling owners in takeover targets have more cash flow rights than controlling12

owners <strong>of</strong> firms that are not taken over. Given the premium paid in takeovers, the larger theequity stake the more the controlling shareholder has to gain from relinquishing control,ceteris paribus. In the average firm not taken over, the controlling shareholder has moreExcess Votes than the average controlling shareholder being taken over. This casualobservation suggests that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> reduce the risk <strong>of</strong> takeovers. <strong>The</strong> medians arehowever not statistically different.<strong>The</strong> median firm being taken over is larger than the median firm not being takenover. 17 And firms being taken over are older than firms not being taken over. <strong>The</strong> me<strong>and</strong>ifference in terms Tobin’s q is driven by extreme values – the median difference suggests nosignificant difference.In panel B we report statistics for three binary variables. Two thirds <strong>of</strong> the firms in oursample have a <strong>family</strong>, an indivi<strong>dual</strong> or a group <strong>of</strong> indivi<strong>dual</strong>s as controlling shareholder(Family). A firm is <strong>class</strong>ified as <strong>family</strong>-controlled when there is a traceable <strong>family</strong> or othergroup <strong>of</strong> indivi<strong>dual</strong>s who ultimately controls the largest voting block <strong>of</strong> <strong>shares</strong> in thecorporation. 18Admittedly, in firms with a passive financial institution as the largestshareholder, a <strong>family</strong> with the second largest voting block may still hold a considerableinfluence. However, when a financial institution is the largest shareholder, typically the otherlarge shareholders are also financial institutions <strong>and</strong> there are no families among the largestshareholders. Furthermore, even when a financial institution is the largest vote holder, its votefraction is generally much smaller than for controlling families. Thus, even if a <strong>family</strong> wouldbe the second largest vote holder, the <strong>family</strong>’s vote fraction would on average be only half <strong>of</strong>families being the largest vote holder.Our source for <strong>ownership</strong> data (Sundin <strong>and</strong> Sundqvist) provides detailed informationon coalition structures <strong>and</strong> families in a wide sense. Thus, if two families are known tocooperate their shareholdings are aggregated in Sundin <strong>and</strong> Sundqvist. We have followed13

their definitions <strong>of</strong> <strong>ownership</strong> coalitions. 19 <strong>The</strong> case for aggregating the <strong>ownership</strong> <strong>of</strong> different<strong>ownership</strong> categories (independent <strong>of</strong> coalitions structures), when <strong>class</strong>ifying firms intodifferent <strong>ownership</strong> types, is less strong since the Swedish corporate law does not allow forcumulative voting when the board <strong>of</strong> directors is elected (La Porta et al.,1998). Thus, differentfamilies can cast their votes on the same c<strong>and</strong>idates when the board <strong>of</strong> directors is elected, buta certain <strong>family</strong> cannot cast all its votes on a particular c<strong>and</strong>idate.Almost 80 percent <strong>of</strong> the firms have <strong>dual</strong> <strong>class</strong> <strong>shares</strong>. In 28.2 percent <strong>of</strong> the firms, thecontrolling shareholders hold all A-<strong>shares</strong> <strong>and</strong> only the B-<strong>shares</strong> are traded on the StockholmStock Exchange. In roughly 40 percent <strong>of</strong> the <strong>dual</strong> <strong>class</strong> firms the controlling shareholderholds all A-<strong>shares</strong>. <strong>The</strong> median controlling shareholder in the <strong>dual</strong> <strong>class</strong> firms holds 75percent <strong>of</strong> the A-<strong>shares</strong> in the firm. 85 percent <strong>of</strong> the <strong>family</strong> firms have <strong>dual</strong> <strong>class</strong> <strong>shares</strong> whileroughly 69 percent <strong>of</strong> non-<strong>family</strong> firms have <strong>dual</strong> <strong>class</strong> <strong>shares</strong>. <strong>The</strong> difference is statisticallyhighly significant.Family firms are less likely to be taken over according to a simple proportion test.Dual <strong>class</strong> firms are more likely to be taken over. <strong>The</strong>se statistics indicate that it is not <strong>dual</strong><strong>class</strong> <strong>shares</strong> per se that work as anti-takeover mechanisms. However, the degree to which thecontrolling owner separates his <strong>ownership</strong> <strong>of</strong> voting rights from his <strong>ownership</strong> <strong>of</strong> cash flowrights (Excess Votes) might be related to the probability <strong>of</strong> a successful takeover.Furthermore, if the controlling shareholder holds all A-<strong>shares</strong>, the firm is also more likely tobe taken over. This is consistent with Zingales’ (1995) argument that it is easier for thecontrolling owner to receive an acceptable compensation for his control rights if the controlblock is complete.III. METHODOLOGY14

In our empirical investigation we would like to model factors explaining the likelihood <strong>of</strong> afirm being taken over. <strong>The</strong> methods developed in the subject <strong>of</strong> survival analysis appear to bethe appropriate tools for our analysis (e.g. Cameron <strong>and</strong> Trivedi, 1996). Survival analysisdeals with the modelling <strong>of</strong> time-to-event data, also known as transition data (or survival timedata or duration data). We consider a time domain for firms, which we can partition into twomutually-exclusive states at each point in time - the status-quo state <strong>and</strong> the state <strong>of</strong> takeover.With the passage <strong>of</strong> time, firms transit (or do not transit) from one state to the other.<strong>The</strong> empirical analysis <strong>of</strong> the data we have got calls for methods which directlyaccount for the sequential nature <strong>of</strong> the data, <strong>and</strong> are able to h<strong>and</strong>le censoring <strong>and</strong> incorporatetime-varying covariates. Ordinary Least Squares (OLS) regressions <strong>of</strong> survival times <strong>and</strong>binary dependent variable regression models (e.g. logit, probit) with transition occurrence asthe dependent variable have important shortcomings in h<strong>and</strong>ling those issues. OLS cannotefficiently utilize information from censored observations. Censored observations in our caseare represented by the companies, which have not experienced the event <strong>of</strong> takeover whileremaining at risk <strong>of</strong> such an event at the end <strong>of</strong> our observation period. Moreover, since OLShas only a single dependent variable it cannot efficiently h<strong>and</strong>le time-varying covariates.Finally, there might be clearly a behavioral aspect in the event <strong>of</strong> takeover weconsider. <strong>The</strong>refore it would be preferable to formulate the model in terms <strong>of</strong> transitionbetween alternative states instead <strong>of</strong> in terms <strong>of</strong> completed spell lengths. Binary dependentvariable models can overcome most <strong>of</strong> the problems related to OLS but fail to accountefficiently for the differences in time each firm in our sample was subject to takeover risk.<strong>The</strong> solution to the problems mentioned above in our context is to model survivaltimes <strong>of</strong> the firms indirectly, via the “hazard rate <strong>of</strong> takeover”. <strong>The</strong> hazard rate captures firms’chances <strong>of</strong> being taken over at each instant (or time period) conditional on survival up to thatpoint.15

<strong>The</strong> unconditional probability <strong>of</strong> not being taken over from the start <strong>of</strong> theobservation period (t=0) until time t>0 for firm i in our sample is equal to λ i (t)dt, where λ i (t) isthe hazard function defined by the equationlim+dt→0Pr[ t + dt ≥ T ≥ t T ≥ t]idti= λ ( t)i<strong>and</strong> dt is an infinitesimal interval <strong>of</strong> time. Alternatively, λ i (t)dt can be interpreted as anunconditional probability <strong>of</strong> a firm i being taken over in tiny interval <strong>of</strong> time [t, t+dt].<strong>The</strong> (instantaneous) hazard rate function for firm i at time t>0 is assumed to take theproportional hazards form′λ ( t ) λ0 ( t)exp(X β )i=itwhere λ 0 (t) is the unknown baseline hazard at time t which may take a parametric or nonparametricform 20 , <strong>and</strong> X it is a vector <strong>of</strong> covariates summarizing observed differences betweenfirms at time t; <strong>and</strong> β is a vector <strong>of</strong> parameters to be estimated.Note that the probability density function in our context is a time to failure functionthat gives the instantaneous probability <strong>of</strong> the event. That is, in a survival experiment wherethe event is firm takeover, the value <strong>of</strong> the density function at time T is the probability that afirm will be taken over precisely at time T. This differs from the hazard function, which givesthe probability conditional on a firm having survived to time T. In this paper we use the terms“hazard rate <strong>of</strong> takeover” or “takeover risk” instead <strong>of</strong> “takeover probability” since what wemodel is the probability per time unit that a firm that has survived to the beginning <strong>of</strong> therespective interval will be taken over in that interval.Although survival <strong>of</strong> firms occurs in continuous time, our data calls for the discretetime specification <strong>of</strong> the model given that the spell length is observed only in one-yearintervals. In other words, the underlying continuous durations are only observed in disjointtime intervals [0 = a 0 , a 1 ), [a 1 , a 2 ), [a 2 , a 3 ), … , [a k-1 , a k = ∞). Our covariates (e.g. firms’16

characteristics) may vary between time intervals but are assumed to be constant within each<strong>of</strong> them.In the discrete case, hazard <strong>of</strong> exit in the jth interval is given by[ a , a ) T a }hj( Xit) = Pr{ T ∈j− 1 j>j−1In our case all intervals have length <strong>of</strong> one year, so the recorded duration for each firmi corresponds to the interval [t i-1 , t i ). Firms are recorded as either being taken over during theinterval, or as still remaining a potential takeover targets. <strong>The</strong> former group, contributingcompleted spell data, are identified using censoring indicator c i =1. For the latter group,contributing right-censored spell data, c i =0. <strong>The</strong> number <strong>of</strong> intervals comprising a censoredspell is defined here to include the last interval within which the firm is observed.<strong>The</strong> log-likelihood can be written in terms <strong>of</strong> the hazard function as:LogL =n∑⎪⎧⎨c⎪⎩⎧log ⎨h⎩( Xti−1ti⎫⎧⎫⎪⎫) ∏[ 1−hs( Xis)] ⎬ + (1 − ci)log⎨∏[ 1−hs( Xis)]⎬ ⎬= ⎭⎩⎭⎪ ⎭i it itii= 1 s 1s=1where the discrete time hazard in the jth interval is⎤ =⎢⎣⎡ j′h = − − +j( Xij) 1 exp exp( Xijβ γj) with γjlog⎥⎦ ∫ λ0 ( τ ) dτ.This specification allows for a fully non-parametric baseline hazard with a separateparameter for each duration interval 21 . Alternatively, the γ j may be described by some semiparametricor parametric function, e.g. θ(j).If we define an indicator variable y it =1 if firm i is taken over during the interval [t-1,t],y it =0 otherwise, then the log-likelihood can be rewritten in sequential binary response form:log L =aa j −1n ti∑∑{ yijlog hj( Xij) + (1 − yij)log[ 1−hj( Xij)]}i= 1 j=1This is one specification <strong>of</strong> log-likelihood, which we estimate.Our second specification incorporates a Gamma distributed r<strong>and</strong>om variables todescribe unobserved (or omitted) heterogeneity between indivi<strong>dual</strong>s.17

<strong>The</strong> instantaneous hazard rate is now specified as′′λ t)= λ ( t)ε exp( X β ) = λ ( t)exp(X β + log( ε ))i(0 i it0itiwhere ε i is a Gamma distributed r<strong>and</strong>om variable with unit mean <strong>and</strong> variance σ 2 ≡ v, <strong>and</strong> thediscrete-time hazard function is nowh ( Xjij)LogL =where1 exp⎡ ′− − exp( X + + log( )) ⎤ijβ γjε⎢⎣⎥⎦=i<strong>The</strong> likelihood function <strong>of</strong> the second model is:n∑i=1log{( 1−c ) A + c B }iiiiAit⎡i1 v exp Xij( j)⎤⎤⎢⎥⎣ j=1⎢⎣⎡ ′= + ∑ β + θ⎥⎦ ⎦−(1/v)<strong>and</strong>Bi⎡= ⎢1+ v⎣ti−1∑j=1exp⎡ ′ ⎤X ( ) ⎤ijβ + θ j⎢⎣⎥⎦⎥⎦−(1/v)− A , if tii> 1, or = 1−A , if tii= 1where θ(j) is a function describing duration dependence in the hazard rate. <strong>The</strong> first model’slog-likelihood function is the limiting case as v→0.Alternative methodologies to test our hypotheses would be to examine failed tender<strong>of</strong>fers or compare the bid premium on A <strong>and</strong> B <strong>shares</strong>. <strong>The</strong>re are only 8 failed bids within oursample which makes a meaningful analysis difficult. Furthermore, we are mainly interested inwhether <strong>dual</strong> <strong>class</strong> <strong>shares</strong> reduce the likelihood <strong>of</strong> tender <strong>of</strong>fers actually taking place. Ourhypotheses are based on the conjecture that potential bidders choose not to make a tender<strong>of</strong>fer after negotiations with the incumbent in <strong>dual</strong> <strong>class</strong> firms. Alternatively, potential biddersdo not even start negotiations with the incumbent.Examining the bid premium on A-<strong>shares</strong> is <strong>of</strong>ten difficult since the A-<strong>shares</strong> are <strong>of</strong>tennot listed, i.e. we do not observe the market price. This could to some extent be h<strong>and</strong>led bycomparing the tender <strong>of</strong>fer price for the A-<strong>shares</strong> to the tender <strong>of</strong>fer price on the B-<strong>shares</strong>.18

However, when the A-<strong>shares</strong> are not traded the bidder <strong>and</strong> the incumbent do not have todisclose the tendered price. Thus, it is difficult to collect this type <strong>of</strong> data. 22IV. EMPIRICAL RESULTSIn this section we first estimate the risk <strong>of</strong> takeovers using the hazard regressions models. Wethen run fixed effect regressions with Tobin’s q <strong>and</strong> pr<strong>of</strong>itability as dependent variables to testwhether firm performance is related to the same variables that prove to be related to theprobability <strong>of</strong> takeovers.A. <strong>The</strong> probability <strong>of</strong> a takeoverIn this section we report the results <strong>of</strong> estimation <strong>of</strong> discrete time proportional hazardsregression models with the hazard rate <strong>of</strong> takeover as dependent variable. 23We includeseveral independent variables. Families most likely hold under-diversified portfolios to alarger extent than non-<strong>family</strong> owners. <strong>The</strong>y therefore have incentive to sell their control block<strong>and</strong> diversify their portfolios. However, families most likely derive more non-transferableprivate benefits <strong>of</strong> control than non-<strong>family</strong> owners. This would suggest that they have lessincentive to sell their control block since they will not be compensated for non-transferableprivate benefits. It is an empirical question whether the incentives to diversify the <strong>family</strong>’sportfolio is stronger than the incentives to hang on to the private benefits <strong>of</strong> control. Wetherefore include a Family dummy variable in all estimated models. It is equal to one if a<strong>family</strong>, an indivi<strong>dual</strong> or a group <strong>of</strong> indivi<strong>dual</strong>s control the firm, <strong>and</strong> zero otherwise.Our first hypothesis is that the wedge between voting rights <strong>and</strong> cash flow rightscaused by the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> reduces the probability that the incumbent will acceptthe price the bidder is willing to pay. We include the difference between the incumbent’sfraction <strong>of</strong> voting rights <strong>and</strong> cash flow rights (Excess Votes) to test this hypothesis. If thebidder is not willing to pay for (all <strong>of</strong>) the private benefits associated with the largest voting19

lock by paying a higher bid premium on the superior voting stock, the incumbent has to becompensated for the loss <strong>of</strong> private benefits by the premium on his cash flow rights. Thus,Excess Votes will capture the reduction in the incumbent’s incentive to accept a certain bidpremium on the cash flow rights as his number <strong>of</strong> cash-flow rights decreases.<strong>The</strong> alternative hypothesis is that higher Excess Votes mean that the incumbent haskept all or almost all <strong>of</strong> the high voting A-<strong>shares</strong>. If this is the case it would facilitate for theincumbent to capture all <strong>of</strong> the proceeds from the sale <strong>of</strong> control rights <strong>and</strong> thereby it wouldincrease the likelihood <strong>of</strong> a successful takeover, ceteris paribus (Zingales, 1995). 24Excess Votes is the difference between the fraction <strong>of</strong> voting rights (Votes) <strong>and</strong> thefraction <strong>of</strong> cash flow rights (Equity). Thus, Excess Votes can e.g. be equal to 0.20 when Votesis equal to 0.5 <strong>and</strong> Equity equal to 0.3. Excess Votes would also be equal to 0.20 when Votesis equal to 0.30 <strong>and</strong> Equity is equal to 0.1. However, the relation to the risk <strong>of</strong> takeover mightdiffer between these two examples. We therefore include Equity in all our estimated models.Previous studies that examine the relation between the risk <strong>of</strong> takeovers <strong>and</strong> <strong>ownership</strong>structure use the manager’s or the largest shareholder’s equity fraction. This variable capturesboth an alignment <strong>of</strong> interest effect <strong>and</strong> an entrenchment effect. In our tests entrenchmenteffects should be captured by Excess Votes, while Equity should capture the alignment <strong>of</strong>interest effect.Our second hypothesis is that the negative relation between the use <strong>of</strong> <strong>dual</strong> <strong>class</strong><strong>shares</strong> (Excess Votes) <strong>and</strong> the hazard rate <strong>of</strong> takeovers should be stronger for <strong>family</strong>controlled firms. <strong>The</strong> reason is that we assume that families derive more non-transferableprivate benefits <strong>of</strong> control. In model specifications M3-M6 in table 3 we therefore includeinteraction terms between Family <strong>and</strong> Non-<strong>family</strong> control <strong>and</strong> Excess Votes <strong>and</strong> Equity,respectively.20

Based on Stulz (1988) we also test whether firm Leverage is related to the hazard rate<strong>of</strong> takeover. By increasing firm leverage the controlling shareholder can increase his control<strong>of</strong> voting rights <strong>and</strong> thereby hindering takeovers. In the <strong>family</strong> controlled firms <strong>family</strong>members <strong>of</strong>ten take an active part in firm management <strong>and</strong> at a takeover the <strong>family</strong> memberswill lose their jobs <strong>and</strong> firm-specific human capital. <strong>The</strong> <strong>family</strong> therefore has strongerincentives as well as opportunities to manipulate firm leverage in order to hinder takeovers.Thus, we expect a negative relation between leverage <strong>and</strong> the hazard rate <strong>of</strong> takeover to bestronger for <strong>family</strong> firms. We therefore include interaction terms between Leverage <strong>and</strong> theFamily <strong>and</strong> Non-Family indicator variables in M5 <strong>and</strong> M6.Firm Size, Firm Age, Investment level, Pr<strong>of</strong>itability (ROA), <strong>and</strong> Liquidity are includedas control variables. <strong>The</strong>se are roughly the same control variables as the variables used by e.g.Palepu (1986), Ambrose <strong>and</strong> Megginson (1992), <strong>and</strong> Dickerson et al. (2002) when estimatingthe probability <strong>of</strong> takeovers.Table 3 reports the results <strong>of</strong> estimation <strong>of</strong> proportional hazards regression modelswith non-parametric baseline hazard specification. Accounting for the effect <strong>of</strong> unobservedheterogeneity across firms on the takeover hazard proves to be an appropriate strategy. <strong>The</strong>likelihood ratio test <strong>of</strong> the size <strong>of</strong> the variance <strong>of</strong> the gamma mixture distribution suggests thatunobserved heterogeneity is significant in all model specifications. Although the parameters’significance does not change greatly with the inclusion <strong>of</strong> unobserved heterogeneity,comparing the models reveals that the impact <strong>of</strong> covariates on the hazard rate <strong>of</strong> takeover tendto be larger in the models accounting for unobserved heterogeneity. <strong>The</strong> later result is notunexpected as it is in line with the predictions <strong>of</strong> econometric theory (e.g. Lancaster, 1990).Non-parametric duration dependency <strong>of</strong> hazard rate in all models is significant <strong>and</strong> positive. 25According to the results in M1 <strong>and</strong> M2 the hazard rate <strong>of</strong> takeover do not differbetween <strong>family</strong> firms <strong>and</strong> other firms, i.e. the Family dummy is insignificant. Excess Votes is21

also insignificant in M1 <strong>and</strong> M2. This result is inconsistent with out first hypothesis. Equity ispositive <strong>and</strong> significant at the 10 (5) percent level in M1 (M2). <strong>The</strong> more cash flow rights theincumbent possesses the higher the hazard rate <strong>of</strong> takeover which is consistent withcontrolling owner’s equity fraction as a proxy for incentive effects <strong>and</strong> Zingales (1995).Family-controlled companies experience a greater hazard <strong>of</strong> takeover relative to otherfirms when interaction terms between Family <strong>and</strong> Excess Votes <strong>and</strong> Equity, respectively, areincluded (M3-M6). Nevertheless, <strong>family</strong>-controlled firms are associated with effects thatdecrease the probability <strong>of</strong> successful takeover. Unlike in other companies, the increase in thewedge between voting power <strong>and</strong> equity share <strong>of</strong> ultimate <strong>family</strong> owners significantly reducestakeover hazard. <strong>The</strong> Family*Excess Votes interaction term is negatively significant. This isconsistent with non-transferable private benefits in <strong>family</strong> firms <strong>and</strong> in support <strong>of</strong> our secondhypothesis.Our results also indicate that the positive relation between the incumbent’s equitystake on takeover hazard (M1 <strong>and</strong> M2) is driven by non-<strong>family</strong> controlled firms. <strong>The</strong> equitystake <strong>of</strong> <strong>family</strong> owners does not have any effect on the probability <strong>of</strong> takeover (M3-M6).As suggested by Stulz (1988) <strong>and</strong> empirically documented in the U.S. by e.g. Palepu(1986), an increase in leverage <strong>of</strong> Swedish companies works as a successful anti-takeoverdevice. Yet, the comparison <strong>of</strong> M1 <strong>and</strong> M2 with M5 <strong>and</strong> M6 in Table 3 reveal that thenegative effect <strong>of</strong> leverage on the probability <strong>of</strong> a takeover is driven by the <strong>family</strong>-controlledfirms. <strong>The</strong> Family*Leverage interaction term is negatively significant in M5 <strong>and</strong> M6. Thus isappears as if leverage is associated with reduced takeover risk only in <strong>family</strong> controlled firms.This result is consistent with the argument that only <strong>family</strong> owners, due to their active part infirm management <strong>and</strong> firm specific human capital, use leverage as an anti-takeover device.A somewhat surprising finding arising from our results is that <strong>ownership</strong> stake,voting power, <strong>and</strong> leverage are the only significant determinates <strong>of</strong> successful takeover.22

Control factors such as firm’s size <strong>and</strong> age, pr<strong>of</strong>itability, investments, liquidity, Tobin q, <strong>and</strong>calendar effects do not have any significant effect on the takeover hazard in our model. <strong>The</strong>next section investigates the relationship between Tobin’s q <strong>and</strong> the other independentvariables in table 3. We therefore rerun all the models in table 3 excluding Tobin’s q. It doesnot change the results.B. Firm Market Value<strong>The</strong> results in table 3 indicate that the risk <strong>of</strong> takeover is significantly reduced with thecontrolling <strong>family</strong>’s excess votes. In this section we explore whether the use <strong>of</strong> <strong>dual</strong> <strong>class</strong><strong>shares</strong> also is related to firm market value. Grossman <strong>and</strong> Hart (1988) note that since a wedgebetween voting rights <strong>and</strong> cash flow rights decrease the likelihood <strong>of</strong> value enhancingtakeovers, the value <strong>of</strong> the firm’s securities will decrease. Our hypothesis is therefore that thereduced risk <strong>of</strong> a takeover is discounted by investors <strong>and</strong> therefore we expect to find anegative relation between the extent to which families use <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> firm marketvalue.Firm market value is approximated by the natural logarithm <strong>of</strong> Tobin’s q (Allayanis<strong>and</strong> Weston, 2001). <strong>The</strong> same independent variables as in the hazard rate models in table 3 areused. We rely on fixed effect regressions as suggested by Himmelberg et al. (1999). Fixedeffect estimates adjust for the possibility that unobservable firm-specific factors influence thelevel <strong>of</strong> Tobin’s q in each indivi<strong>dual</strong> firm <strong>and</strong> are equivalent to estimating OLS models <strong>and</strong>including an indicator variable for each firm. Zhou (2001) argues that <strong>ownership</strong> variablesvary significantly across firms but relatively little within firms. It is therefore unlikely thatwithin (fixed effects) estimates panel tests will show any relations between <strong>ownership</strong> <strong>and</strong>performance even when it does in fact exist. However, we have 16 years <strong>of</strong> data <strong>and</strong> somevariations in the <strong>ownership</strong> variables. Furthermore, an F-test indicates that we indeed have23

firm specific fixed effects. Pooling the data <strong>and</strong> estimating OLS without firm dummies wouldresult in biased estimates. Finally, the Hausman test rejects that the firm specific fixed effectsare uncorrelated with the regressors, which makes r<strong>and</strong>om effect estimations unsuitable.<strong>The</strong> results are reported in table 4 panel A. In M1 Excess Votes is negativelysignificant in line with our hypothesis <strong>and</strong> earlier results (Claessens et al., 2002; Cronqvist<strong>and</strong> Nilsson, 2003). However, M2 <strong>and</strong> M3 indicate that it is only for families that ExcessVotes is associated with a reduced firm market value. <strong>The</strong> Family*Excess Votes interactionterm is negatively significant while the Non<strong>family</strong>*Excess Votes is insignificant.When the Excess votes <strong>and</strong> Equity interaction terms are included, the Family indicatorvariable becomes positively significant. Thus, <strong>family</strong> control per se is associated with highermarket value, consistent with U.S. results (Anderson <strong>and</strong> Reeb, 2003a). However, when the<strong>family</strong> relies on <strong>dual</strong> <strong>class</strong> <strong>shares</strong> to keep control the positive effect <strong>of</strong> <strong>family</strong> control issignificantly reduced. Similar results are reported for Fortune 500 firms controlled by families(Villalonga <strong>and</strong> Amit, 2004).<strong>The</strong> Equity variable is negatively significant in M1. When Family*Equity <strong>and</strong>Non<strong>family</strong>*Equity interaction terms are included in M2 Family*Equity remains negativelysignificant while the Non<strong>family</strong>*Equity is insignificant. <strong>The</strong> alignment <strong>of</strong> interest effectsuggests that Equity should be positive (Jensen <strong>and</strong> Meckling, 1976; Burkart et al., 1998). Yeta negative effect may occur if blockholdings above a certain level leads to excessive riskaversion or risk avoidance due to the blockowners’ risk exposure (Fama <strong>and</strong> Jensen, 1983;Shleifer <strong>and</strong> Vishny, 1986; Bolton <strong>and</strong> von Thadden, 1998). 26 Anderson <strong>and</strong> Reeb (2003b)document that <strong>family</strong> owners <strong>of</strong>ten hold poorly diversified portfolios.Leverage is negatively significant at the 10% level in M1 <strong>and</strong> M2. When we includeFamily*Leverage <strong>and</strong> Non<strong>family</strong>*Leverage interaction terms in M3 Family*Leverage isnegatively significant while Non<strong>family</strong>*Leverage is insignificant. This is the same pattern as24

in the estimated hazard models in table 3. Thus, it appears as if the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong><strong>and</strong> leverage in <strong>family</strong> firms reduce the likelihood <strong>of</strong> value enhancing takeovers <strong>and</strong> that bothmechanisms are discounted by outside investors.Firm value is negatively related to Firm Size <strong>and</strong> Firm Age while positively related toPr<strong>of</strong>itability <strong>and</strong> Investment level. This corroborates earlier results (see e.g. Anderson <strong>and</strong>Reeb, 2003a; Cronqvist <strong>and</strong> Nilsson, 2003). <strong>The</strong> Liquidity variable is insignificant.C. Operating PerformanceIn this section we explore whether the negative relation between firm value <strong>and</strong> <strong>dual</strong> <strong>class</strong><strong>shares</strong> <strong>and</strong> firm leverage, respectively, is explained by lower operating performance.Grossman <strong>and</strong> Hart (1988) show that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> can reduce the likelihood <strong>of</strong> efficiencyimproving takeovers <strong>and</strong> argue that this reduced likelihood translates into lower firm marketvalue, ceteris paribus. Thus, <strong>dual</strong> <strong>class</strong> <strong>shares</strong> per se do not necessarily lead to worseoperating performance. However, <strong>dual</strong> <strong>class</strong> <strong>shares</strong> may at some time in the future hinder atakeover that could have improved operating performance <strong>and</strong> this is discounted by investors.In other words, the likelihood that the shareholders will receive a takeover premium isreduced. If the negative relation between <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> firm market value indeed stemfrom lower likelihood <strong>of</strong> efficiency improving takeovers per se, we would expect to find nosignificant relation between <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> operating performance. <strong>The</strong> same argumentcan be made for the negative relation between leverage <strong>and</strong> firm market value.We first exclude Pr<strong>of</strong>itability in M4-M6 in table 4 panel A. <strong>The</strong> coefficients <strong>and</strong> t-values for Equity <strong>and</strong> Excess Votes variables <strong>and</strong> their interaction terms with the Family <strong>and</strong>Non<strong>family</strong> indicator variables are roughly the same as in M1-M3. <strong>The</strong>se results suggest thatthere is little multicollinearity between Pr<strong>of</strong>itability <strong>and</strong> Equity <strong>and</strong> Excess Votes,respectively. We note however, that the coefficient <strong>and</strong> t-value on the Family indicator25

variable increases in M6 compared to M3. Additionally, the coefficients <strong>and</strong> t-values <strong>of</strong>Leverage are higher in M4-M6 compared to M1-M3. Thus, there appears to bemulticollinearity between Pr<strong>of</strong>itability <strong>and</strong> Leverage <strong>and</strong> Family, respectively.In table 4 panel B we estimate fixed effect regression models with Pr<strong>of</strong>itability asdependent variable. We use the same independent variables as in panel A. We find noindications that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> (Excess Votes) are related to operating performance. Neitherdo we find indications that the largest shareholder’s Equity fraction is related to operatingperformance. This is further evidence that the negative relation between <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong>firm market value indeed stem from the lower takeover probability estimated in table 3.Family control is positively related to Pr<strong>of</strong>itability (M1 <strong>and</strong> M3) while Leverage <strong>and</strong>Firm Age are negatively related to Pr<strong>of</strong>itability. <strong>The</strong> negative relation between Leverage <strong>and</strong>Pr<strong>of</strong>itability is twice as strong for <strong>family</strong> firms (-0.17 compared to -0.086). Thus, part <strong>of</strong> thenegative relation between Leverage <strong>and</strong> firm value for <strong>family</strong> firms in panel A is driven bylower operating performance. However, in M3 panel A we control for Pr<strong>of</strong>itability <strong>and</strong>Family*Leverage is still negatively significant at the 5 percent level.Summing up the main results in table 3 <strong>and</strong> table 4: Family control per se is associatedwith a higher risk <strong>of</strong> takeover <strong>and</strong> higher market value; however, when the <strong>family</strong> uses <strong>dual</strong><strong>class</strong> <strong>shares</strong>, both the risk <strong>of</strong> takeover <strong>and</strong> firm market value decrease; we observe the samepattern for leverage in <strong>family</strong> controlled firm -- when <strong>family</strong> firms increase their leverage,both the risk <strong>of</strong> takeover <strong>and</strong> firm market value decrease. We find no relation between <strong>dual</strong><strong>class</strong> <strong>shares</strong> <strong>and</strong> return on assets indicating that the discount associated with <strong>dual</strong> <strong>class</strong> <strong>shares</strong>does not stem from poor operating performance.V. SUMMARY AND CONCLUSIONS26

In this paper we investigate the Swedish market for corporate control <strong>and</strong> explore the linksbetween firms’ market value, <strong>dual</strong> <strong>class</strong> <strong>shares</strong>, <strong>and</strong> controlling shareholders’ type. Weestimate hazard functions on an unbalanced panel <strong>of</strong> large Swedish non-financial firms listedon the Stockholm Stock Exchange 1985-2000. In all test we distinguish between <strong>family</strong>control <strong>and</strong> non-<strong>family</strong> control. First, we find that <strong>family</strong> controlled firms have a higherhazard rate <strong>of</strong> takeover. Second, in <strong>family</strong> controlled firms the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong>leverage are associated with reduced hazard rate <strong>of</strong> takeover. We also run fixed effectsregression models with Tobin’s q as dependent variable. Family control per se is associatedwith higher Tobin’s q. However, in <strong>family</strong> firms the use <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> leverage areassociated with reduced firm value. A general implication <strong>of</strong> our results is that they stress theneed to control for the identity <strong>of</strong> the controlling owner in studies <strong>of</strong> corporate control <strong>and</strong>firm performance.Even though extraction <strong>of</strong> pecuniary benefits cannot be ruled out, we conclude that<strong>family</strong>-owners’ consumption <strong>of</strong> non-transferable <strong>and</strong> non-pecuniary benefits <strong>of</strong> control is amore likely explanation for our results. Families derive private benefits <strong>of</strong> control such asstatus, political influence, <strong>and</strong> power over people. <strong>The</strong> consumption <strong>of</strong> such non-pecuniarybenefits does not necessary decrease takeover probability <strong>and</strong> the firm value. In fact, <strong>family</strong>control per se tends to be associated with an increased likelihood <strong>of</strong> a takeover <strong>and</strong> higherfirm market value. Furthermore, the proxies for (pecuniary) private benefits are small inSweden. Nevertheless, non-transferable private benefits <strong>of</strong> control together with deviationsfrom one share-one vote, reduce the likelihood that value enhancing takeovers go through.<strong>The</strong> reduced likelihood <strong>of</strong> value enhancing takeovers translates into lower firm market value.27

ACKNOWLEDGEMENTS<strong>The</strong> authors are grateful to an anonymous referee, Mark Taylor (the editor), Neil Brisley,participants at 2005 EFM Corporate Governance Symposium in Leeds, <strong>and</strong> the workshopparticipants at University <strong>of</strong> Groningen for valuable comments. Financial support from JanWall<strong>and</strong>ers <strong>and</strong> Tom Hedelius Foundation <strong>and</strong> the Bank <strong>of</strong> Sweden Tercentenary Foundationis gratefully acknowledged. We express our gratitude to Kristian Rydqvist for supplying some<strong>of</strong> the data used in this study.28

ReferencesAllayanis, G. <strong>and</strong> J. Weston (2001) <strong>The</strong> use <strong>of</strong> foreign currency derivatives <strong>and</strong> firm marketvalue, Review <strong>of</strong> Financial Studies, 14, 243-76.Ambrose, B. W. <strong>and</strong> W. L. Megginson (1992) <strong>The</strong> role <strong>of</strong> asset structure, <strong>ownership</strong> structure,<strong>and</strong> takeover defences in determining acquisition likelihood, Journal <strong>of</strong> Financial <strong>and</strong>Quantitative Analysis, 27, 575-89.Anderson, B. W. <strong>and</strong> D. M. Reeb (2003a) Founding <strong>family</strong> <strong>ownership</strong> <strong>and</strong> firm performance,Journal <strong>of</strong> Finance, 58, 1301-29.Anderson, B. W. <strong>and</strong> D. M. Reeb (2003b) Founding-<strong>family</strong> <strong>ownership</strong>, corporatediversification, <strong>and</strong> firm leverage, Journal <strong>of</strong> Law <strong>and</strong> Economics, 46, 653-84.Anderson, R.C., S.A. Mansi, <strong>and</strong> D.M. Reeb (2003) Founding <strong>family</strong> <strong>ownership</strong> <strong>and</strong> theagency cost <strong>of</strong> debt, Journal <strong>of</strong> Financial Economics, 68, 263-85.Barclay, M. J., C. G. Holderness, <strong>and</strong> J. Pontiff (1993) Private benefits from block <strong>ownership</strong><strong>and</strong> discounts on closed-end funds, Journal <strong>of</strong> Financial Economics, 33, 263-91.Bebchuk, L. A., R. Kraakman, <strong>and</strong> G. Triantis (2000) Stock pyramids, cross-<strong>ownership</strong>, <strong>and</strong><strong>dual</strong> <strong>class</strong> equity: <strong>The</strong> creation <strong>and</strong> agency costs <strong>of</strong> separating control from cash flow rights,in R. K. Morck (ed), Concentrated Corporate Ownership. NBER, University <strong>of</strong> ChicagoPress.Becht, M., <strong>and</strong> C. Mayer, C. (2001) <strong>The</strong> control <strong>of</strong> corporate Europe, in F. Barca <strong>and</strong> M.Becht (ed), <strong>The</strong> Control <strong>of</strong> Corporate Europe. Oxford University Press.Bergström, C. <strong>and</strong> K. Rydqvist (1989) Stock price reactions to tender <strong>of</strong>fers in Sweden, SNSOccational Papers No. 11.Bolton, P. <strong>and</strong> E. von Thadden E. (1998) Blocks, liquidity, <strong>and</strong> corporate control, Journal <strong>of</strong>Finance, 53, 1- 25.Burkart, M., D. Gromb, <strong>and</strong> F. Pannunzi (1998) Why higher takeover premia protect minorityshareholders, Journal <strong>of</strong> Political Economy, 106, 172-204.Burkart, M., F. Panunzi, <strong>and</strong> A. Shleifer (2003) Family firms, Journal <strong>of</strong> Finance, 58, 2167-2202.Cameron, A. C. <strong>and</strong> P. K. Trivedi (1996) Count data models for financial data, in G. S.Maddala <strong>and</strong> C. R. Rao (ed), H<strong>and</strong>book <strong>of</strong> Statistics, Vol 14, Statistical Methods in Finance.North-Holl<strong>and</strong>, Amsterdam.Claessens, S., S. Djankov, J. Fan, <strong>and</strong> L. H. P. Lang (2002) Disentangling the incentive <strong>and</strong>entrenchment effects <strong>of</strong> large shareholdings, Journal <strong>of</strong> Finance, 57, 2741-71.29

Claessens, S., S. Djankov, <strong>and</strong> L. H. P. Lang (2000) <strong>The</strong> separation <strong>of</strong> <strong>ownership</strong> <strong>and</strong> controlin East Asian Corporations, Journal <strong>of</strong> Financial Economics, 58, 81-112.C<strong>of</strong>fee, J. (2001) Do norms matter? A cross-country examination <strong>of</strong> the private benefits <strong>of</strong>control, Working paper, Columbia University.Comment, R., <strong>and</strong> G. W. Schwert (1995) Poison or placebo? Evidence on the deterrence <strong>and</strong>wealth effects <strong>of</strong> antitakeover measures, Journal <strong>of</strong> Financial Economics, 39, 3-43.Cronqvist, H. <strong>and</strong> M. Nilsson (2003) Agency costs <strong>of</strong> controlling minority shareholders,Journal <strong>of</strong> Financial <strong>and</strong> Quantitative Analysis, 38, 695-719.DeAngelo, H. <strong>and</strong> L. DeAngelo (1985) Managerial <strong>ownership</strong> <strong>of</strong> voting rights: a study ifpublic corporation with <strong>dual</strong> <strong>class</strong>es <strong>of</strong> common stock, Journal <strong>of</strong> Financial Economics, 14,33-39.Demsetz, H. <strong>and</strong> K. Lehn (1985) <strong>The</strong> structure <strong>of</strong> corporate <strong>ownership</strong>: Causes <strong>and</strong>consequences, Journal <strong>of</strong> Political Economy, 93, 1155-77.Denis, D. <strong>and</strong> D. Denis (1994) Majority-owner managers <strong>and</strong> organizational efficiency,Journal <strong>of</strong> Corporate Finance, 1, 91-118.Dickerson, A. P., H. D. Gibson, <strong>and</strong> E. Tsakalatos (2002) Takeover risk <strong>and</strong> the market forcorporate control: <strong>The</strong> experience <strong>of</strong> British firms in the 1970s <strong>and</strong> 1980s, InternationalJournal <strong>of</strong> Industrial Organization, 20, 1167-95.Doukas, J. A., M. Holmen, <strong>and</strong> N. Travlos (2002) Diversification, <strong>ownership</strong> <strong>and</strong> control <strong>of</strong>Swedish corporations, European Financial Management, 8, 281-314.Dyck, A. <strong>and</strong> L. Zingales (2004) Private benefits <strong>of</strong> control: An international comparison,Journal <strong>of</strong> Finance, 59, 537-600.Espahbodi, H. <strong>and</strong> P. Espaboudi (2003) Binary choice models <strong>and</strong> corporate takeover,Journal <strong>of</strong> Banking <strong>and</strong> Finance, 27, 549-74.Faccio, M. <strong>and</strong> L. H. P. Lang (2002) <strong>The</strong> ultimate <strong>ownership</strong> <strong>of</strong> Western Europeancorporations, Journal <strong>of</strong> Financial Economics, 65, 365-95.Grossman, S. <strong>and</strong> O. Hart (1988) One share - one vote <strong>and</strong> the market for corporate control,Journal <strong>of</strong> Financial Economics, 20, 175-202.Harbrouck, J. (1985) <strong>The</strong> characteristics <strong>of</strong> takeover targets: q <strong>and</strong> other measures, Journal <strong>of</strong>Banking <strong>and</strong> Finance, 9, 351-62.Hillier, D. <strong>and</strong> P. McColgan (2005) Firm performance <strong>and</strong> managerial succession in <strong>family</strong>firms, working paper, Leeds University Business School.Himmelberg, C., G. Hubbard, <strong>and</strong> D. Palia (1999) Underst<strong>and</strong>ing the determinants <strong>of</strong>managerial <strong>ownership</strong> <strong>and</strong> the link between <strong>ownership</strong> <strong>and</strong> performance, Journal <strong>of</strong> FinancialEconomics, 53, 353-84.30

Holmén, M. <strong>and</strong> P. Högfeldt (2004) A law <strong>and</strong> finance analysis <strong>of</strong> initial public <strong>of</strong>ferings,Journal <strong>of</strong> Financial Intermediation, 13, 324-58.Holmén, M. <strong>and</strong> J. D. Knopf (2004) Minority shareholder protection <strong>and</strong> the private benefits<strong>of</strong> control for Swedish mergers, Journal <strong>of</strong> Financial <strong>and</strong> Quantitative Analysis, 39, 167-91.Jaggia, S. <strong>and</strong> S. Thosar (1995) Contested tender <strong>of</strong>fers: An estimate <strong>of</strong> the hazard function,Journal <strong>of</strong> Business <strong>and</strong> Economic Statistics, 13, 113-19.Jarrell, G. A. <strong>and</strong> A. B. Poulsen (1988) Dual-<strong>class</strong> recapitalizations as antitakeovermechanisms: <strong>The</strong> recent evidence, Journal <strong>of</strong> Financial Economics, 20, 129-52.Jensen, M. C., <strong>and</strong> W. Meckling (1976) <strong>The</strong> theory <strong>of</strong> the firm: Managerial behavior <strong>and</strong>,agency costs <strong>and</strong> <strong>ownership</strong> structure, Journal <strong>of</strong> Financial Economics, 3, 305-60.La Porta, R., F. Lopez-de-Silanes, A. Shleifer, <strong>and</strong> R. W. Vishny (1998) Law <strong>and</strong> finance,Journal <strong>of</strong> Political Economy, 106, 1113-55.La Porta, R., F. Lopez-de-Silanes, <strong>and</strong> A. Shleifer (1999) Corporate <strong>ownership</strong> around theworld, Journal <strong>of</strong> Finance, 54, 471-517.Lancaster, T. (1990) <strong>The</strong> Econometric Analysis <strong>of</strong> Transition Data. Econometric SocietyMonographs, No. 17. Cambridge: Cambridge University Press.Meyer, B. D. (1990) Unemployment insurance <strong>and</strong> unemployment spells. Econometrica, 58,757-782.Mikkelson, W. H. <strong>and</strong> M. M. Partch (1989) Manager’s voting rights <strong>and</strong> corporate control,Journal <strong>of</strong> Financial Economics, 25, 263-90.Morck, R., A. Shleifer, <strong>and</strong> R. Vishny (1989) Alternative mechanisms for corporate control,American Economic Review, 79, 842-52.Morck, R., D. A. Strangel<strong>and</strong>, <strong>and</strong> B. Yeung (2000) Inherited wealth, corporate control <strong>and</strong>economic growth: <strong>The</strong> Canadian disease, in R. Morck ed.: Concentrated CorporateOwnership, University <strong>of</strong> Chicago Press, Chicago.Nenova, T. (2003) <strong>The</strong> value <strong>of</strong> corporate voting rights <strong>and</strong> control: A cross-country analysis.Journal <strong>of</strong> Financial Economics, 68, 325-51.Palepu, K. G. (1986) Predicting takeover targets: A methodological <strong>and</strong> empirical analysis,Journal <strong>of</strong> Accounting <strong>and</strong> Economics, 8, 3-35.Powell, R. G. (1997) Modelling takeover likelihood, Journal <strong>of</strong> Finance <strong>and</strong> Accounting, 24,1009-30.Prentice, R. <strong>and</strong> L. Gloeckler (1978) Regression analysis <strong>of</strong> grouped survival data withapplication to breast cancer data, Biometrics, 34, 57-67.31

Rydqvist, K. (1993) <strong>The</strong> division <strong>of</strong> takeover gains in Sweden, CEPR working papers No. 31.Rydqvist, K. (1996) Takeover bids <strong>and</strong> the relative prices <strong>of</strong> <strong>shares</strong> that differ in their votingrights, Journal <strong>of</strong> Banking <strong>and</strong> Finance, 20, 1407-25.Shivdasani, A. (1993) Board composition, <strong>ownership</strong> structure, <strong>and</strong> hostile takeovers, Journal<strong>of</strong> Accounting <strong>and</strong> Economics, 16, 167-98.Shleifer, A. <strong>and</strong> R. W. Vishny (1986) Large shareholdings <strong>and</strong> corporate control, Journal <strong>of</strong>Political Economy, 94, 461-88.Sinha, R. (2004) <strong>The</strong> role <strong>of</strong> hostile takeovers in corporate governance, Applied FinancialEconomics, 14, 1291-1305.Song, M. H. <strong>and</strong> R. A. Walkling, (1993) <strong>The</strong> impact <strong>of</strong> managerial <strong>ownership</strong> on acquisitionattempts <strong>and</strong> target shareholder wealth, Journal <strong>of</strong> Financial <strong>and</strong> Quantitative Analysis, 28,439-57.Stulz, R. (1988) Managerial control <strong>of</strong> voting rights: Financing <strong>and</strong> the market for corporatecontrol, Journal <strong>of</strong> Financial Economics, 20, 25-54.Stulz, R., R. A. Walkling, <strong>and</strong> M. H. Song (1990) <strong>The</strong> distribution <strong>of</strong> target <strong>ownership</strong> <strong>and</strong> thedivision <strong>of</strong> gains in successful takeovers, Journal <strong>of</strong> Finance, 45, 817-33.Sudarsanam, S. (2003) Creating Value form Mergers <strong>and</strong> Acquisitions: <strong>The</strong> Challenges,Prentice Hall, Essex, Engl<strong>and</strong>Sundqvist, S. I., (1985-1993) Owners <strong>and</strong> Power in Sweden’s Listed Companies, DagensNyheter, Stockholm.Sundin, Anneli, <strong>and</strong> Sven-Ivan Sundqvist (1994-2001) Owners <strong>and</strong> Power in Sweden’s ListedCompanies, Dagens Nyheter, Stockholm.Villalonga, B. <strong>and</strong> R. Amit (2004) How do <strong>family</strong> <strong>ownership</strong>, management, <strong>and</strong> control affectfirm value?, Journal <strong>of</strong> Financial Economics, forthcomingWalkling, R. A. <strong>and</strong> M. S. Long (1984) Agency theory, managerial welfare, <strong>and</strong> takeover bidresistance, R<strong>and</strong> Journal <strong>of</strong> Economics, 1, 54-68Weir, C. (1997) Corporate governance, performance <strong>and</strong> takeovers: an empirical analysis <strong>of</strong>UK mergers, Applied Economics, 29, 1465-75.Zhou, X. (2001) Underst<strong>and</strong>ing the determinants <strong>of</strong> managerial <strong>ownership</strong> <strong>and</strong> the linkbetween <strong>ownership</strong> <strong>and</strong> performance: Comment, Journal <strong>of</strong> Financial Economics, 62, 559-71.Zingales, L. (1995) Insider <strong>ownership</strong> <strong>and</strong> the decision to go public, Review <strong>of</strong> EconomicStudies, 62, 425-48.32

Table 1. Frequency <strong>of</strong> takeovers <strong>of</strong> large Swedish non-financial firms listed on the StockholmStock Exchange 1985-2000Panel A: Our sampleYear 1.Number <strong>of</strong>Sample Firms2.Percentage<strong>of</strong> marketcapitalization3.Number <strong>of</strong>Takeovers<strong>of</strong> SampleFirms4.Percentage<strong>of</strong> samplefirms beingtaken over5.Percentage <strong>of</strong>taken overfirmsincluded insample6.Percentage <strong>of</strong>total value takenover included insample1986 80 60.3 0 0.0 0.0 0.01987 89 70.7 1 1.1 20.0 58.51988 91 66.9 1 1.1 6.3 38.91989 88 60.1 1 1.1 12.5 64.01990 95 73.1 2 2.1 16.7 21.11991 95 70.1 2 2.1 25.0 81.31992 92 71.2 1 1.1 33.3 17.61993 93 72.8 2 2.1 66.7 99.91994 95 78.4 2 2.1 20.0 36.41995 110 81.1 0 0.0 0.0 0.01996 118 78.3 5 4.2 50.0 93.91997 133 81.2 5 3.7 29.4 43.41998 141 75.6 1 0.7 9.1 95.21999 140 70.5 12 8.5 46.2 75.62000 127 53.0 6 4.6 25.0 11.72001 119 70.5 6 4.9 37.5 79.9Panel B: Stockholm Stock ExchangeYear 1.Number <strong>of</strong>listed firmsbeginning <strong>of</strong>the year2.MarketCapitalizationbeginning <strong>of</strong>the year3.Number <strong>of</strong>successful nonpartialtakeoversduring the year4.Percentage <strong>of</strong> listedfirms subject tosuccessful nonpartialtakeovers5.Percentage <strong>of</strong> marketcapitalization subjectto successful nonpartialtakeovers1986 246 302 20 8.1 2.81987 238 441 5 2.1 0.81988 257 436 16 6.2 2.31989 239 613 8 3.3 3.51990 241 766 12 5.0 0.71991 218 544 8 3.7 2.51992 200 548 3 1.5 0.31993 184 547 3 1.6 1.61994 193 892 10 5.2 1.41995 213 1026 14 6.6 4.21996 209 1208 10 4.8 1.91997 218 1834 17 7.8 5.11998 236 2102 11 4.7 12.91999 243 2354 26 10.7 3.12000 268 3781 24 9.0 2.52001 287 3300 16 5.6 2.3Note: In this table we provide statistics on the number <strong>of</strong> sample firms <strong>and</strong> the frequency <strong>of</strong> successful nonpartialtender <strong>of</strong>fers on Swedish non-financial firms listed on the Stockholm Stock Exchange 1986-2001. <strong>The</strong>sample consists <strong>of</strong> 200 firms <strong>and</strong> 1706 firm years. 47 firms were subject to successful non-partial tender <strong>of</strong>fers.33

Table 2. Descriptive statistics large Swedish non-financial firms 1985-2000Panel A: Continuous variablesTotal Sample, Not Takeover Takeover Targets, DifferenceN=1706 Targets, N=1281N=425Mean Median Mean Median Mean Median t-test RanksumtestEquity 0.323 0.290 0.320 0.290 0.335 0.310 1.460 2.213**Votes 0.489 0.490 0.489 0.500 0.489 0.480 0.045 0.171Excess Votes 0.166 0.150 0.169 0.150 0.153 0.140 1.947* 1.494Firm Size 1 9561 1525 10175 1327 7713 2883 2.061** 2.683***Firm Age 1 59 47 54 46 74 59 2.965*** 2.823***Investment 0.112 0.085 0.112 0.083 0.113 0.090 0.007 0.703Pr<strong>of</strong>itability 0.081 0.124 0.078 0.124 0.089 0.125 0.421 0.447Leverage 0.261 0.237 0.261 0.227 0.262 0.253 0.118 1.579Liquidity 0.539 0.564 0.537 0.553 0.545 0.592 0.651 1.053Tobin’s q 1 1.538 1.146 1.609 1.147 1.325 1.143 2.739*** 0.4791 mean difference tested on the natural logarithm <strong>of</strong> these variables.Panel B: Binary variablesTotal Sample,N=1706Not Takeover Targets, Takeover Targets, DifferenceN=1281N=425Proportion Proportion Proportion Proportion testFamily 0.673 0.691 0.621 2.655***Dual ClassShares 0.789 0.770 0.849 3.493***Controllingowner holds allA-<strong>shares</strong>0.282 0.268 0.327 2.353**Note: In this table we provide summary statistics for the 200 firms <strong>and</strong> 1706 firm years in our sample. <strong>The</strong>sample is split by whether the firm was subject to a successful non-partial tender <strong>of</strong>fer 1985-2000 (47 firms). Allfirm years (N=425) prior to the successful non-partial takeover are <strong>class</strong>ified as belonging to a takeover target.Equity is defined as the controlling shareholder’s (largest voteholder) fraction <strong>of</strong> cash flow rights in the firm.Votes is defined as the controlling shareholder’s fraction <strong>of</strong> voting rights in the firm. Excess Votes is defined asVotes minus Equity. Firm Size is defined as the book value <strong>of</strong> total assets in Million SEK. Firm Age is defined asthe number <strong>of</strong> years since the firm was founded. Investment is defined as total capital expenditure divided by thebook value <strong>of</strong> total assets. Pr<strong>of</strong>itability is equal to Earnings Before Interest, Taxes, <strong>and</strong> Depreciation (EBITD)di8vided by the book value <strong>of</strong> total assets. Leverage is equal to the value <strong>of</strong> long term debt divided by the bookvalue <strong>of</strong> total assets. Liquidity is equal to the value <strong>of</strong> short term assets divided by the book value <strong>of</strong> total assets.Tobin’s q is defined as the sum <strong>of</strong> market value <strong>of</strong> equity <strong>and</strong> book value <strong>of</strong> debt divided by the book value <strong>of</strong>total assets. Family is equal to one if the ultimate controlling shareholder is a <strong>family</strong>, an indivi<strong>dual</strong>, or a group <strong>of</strong>indivi<strong>dual</strong>s, <strong>and</strong> zero otherwise. Dual Class Shares is equal to one if the firm has issued <strong>shares</strong> with differentialvoting rights, <strong>and</strong> zero otherwise. Controlling owner holds all A-Shares is equal to one if the controlling ownerholds all A-<strong>shares</strong> (high voting <strong>shares</strong>) <strong>and</strong> zero otherwise. Median Difference tested by means <strong>of</strong> Wilcoxon-Ranksum test. *** Significant at the 1% level; ** Significant at the 5% level; * Significant at the 10% level.34

Table 3. Estimated models <strong>of</strong> the hazard rate <strong>of</strong> takeoverM1WithoutUnobservedHeterog.Family -0.136(0.40)Equity 1.426(1.90)*Excess Votes -1.658(1.36)M2Gamma Dist.UnobservedHeterog.-0.389(0.84)2.667(2.20)**-1.063(0.54)M3WithoutUnobservedHeterog.1.620(2.17)**Family*Equity 0.449(0.47)NonFamily*Equity 3.140(2.71)***Family*Excess Votes -3.869(2.58)***Non<strong>family</strong>*Excess Votes 2.749(1.48)Leverage -1.822(1.79)*-2.973(1.92)*-1.680(1.66)*M4Gamma Dist.UnobservedHeterog.2.527(2.23)**1.100(0.81)6.157(2.71)***-3.750(1.77)*6.209(1.95)*-2.962(1.93)*M5WithoutUnobservedHeterog.2.128(2.38)**0.508(0.53)3.363(2.81)***-3.822(2.55)**2.814(1.51)Family*Leverage -2.514(1.93)*Non<strong>family</strong>*Leverage -0.511(0.36)Ln(Firm Age) -0.023(0.13)Ln(Firm Size) 0.046(0.49)Pr<strong>of</strong>itability 0.965(0.41)Investment -0.700(0.39)Liquidity 0.299(0.38)Ln(Tobin’s q) -0.256(0.74)T80 -0.044(0.08)-0.048(0.19)0.162(0.90)0.636(0.26)-0.726(0.36)0.897(0.72)-0.507(0.89)0.051(0.08)LR test <strong>of</strong> frailty χ 2 (3) = 4.31[.0190]Non-parametric baseline χ 2 (1) = 16.66 χ 2 (1) = 11.61hazard[0.008] [0.009]0.011(0.07)0.017(0.18)1.076(0.48)-1.008(0.55)0.177(0.22)-0.347(0.98)-0.016(0.03)χ 2 (1) = 17.57[0.005]-0.069(0.25)0.110(0.63)0.941(0.38)-1.131(0.55)0.435(0.37)-0.580(1.05)0.213(0.34)χ 2 (3) = 6.41[0.006]χ 2 (1) = 14.48[0.002]0.011(0.06)0.019(0.19)1.005(0.46)-1.070(0.59)0.063(0.08)-0.361(1.04)-0.003(0.00)χ 2 (1) = 17.69[0.005]M6Gamma Dist.UnobservedHeterog.2.913(2.28)**1.209(0.87)6.179(2.73)***-3.841(1.82)*5.992(1.89)*-3.529(1.99)**-1.743(0.77)-0.055(0.20)0.105(0.61)0.865(0.36)-1.134(0.56)0.364(0.31)-0.586(1.07)0.205(0.33)χ 2 (3) = 5.72[0.008]χ 2 (1) = 14.28[0.003]Log-likelihood value -192.24 -190.09 -187.92 -185.01 -186.94 -184.08AIC 0.243 0240 0.240Note: In this table we report models estimating the hazard rate <strong>of</strong> the firm being subject to a successful nonpartialtender <strong>of</strong>fer. <strong>The</strong> sample consists <strong>of</strong> 200 firms <strong>and</strong> 1706 firm years. 47 firms were subject to successfulnon-partial tender <strong>of</strong>fers. We report models without unobserved heterogeneity (M1, M3, <strong>and</strong> M5) <strong>and</strong> withGamma distributed unobserved heterogeneity (M2, M4, <strong>and</strong> M6), respectively. Coefficients are reported with z-statistics in parenthesis. ***. **, <strong>and</strong> * denote significance at the 1%, 5%, <strong>and</strong> 10% level, respectively. Family isequal to one if the ultimate controlling shareholder is a <strong>family</strong>, an indivi<strong>dual</strong>, or a group <strong>of</strong> indivi<strong>dual</strong>s, <strong>and</strong> zerootherwise. Equity is defined as the controlling shareholder’s (largest voteholder) fraction <strong>of</strong> cash flow rights inthe firm. Votes is defined as the controlling shareholder’s fraction <strong>of</strong> voting rights in the firm. Excess Votes isdefined as Votes minus Equity. Firm Size is defined as the book value <strong>of</strong> total assets in Million SEK. Firm Age isdefined as the number <strong>of</strong> years since the firm was founded. Investment is defined as total capital expendituredivided by the book value <strong>of</strong> total assets. Pr<strong>of</strong>itability is equal to Earnings Before Interest, Taxes, <strong>and</strong>Depreciation (EBITD) divided by the book value <strong>of</strong> total assets. Leverage is equal to the value <strong>of</strong> long term debtdivided by the book value <strong>of</strong> total assets. Liquidity is equal to the value <strong>of</strong> short term assets divided by the bookvalue <strong>of</strong> total assets. Tobin’s q is defined as the sum <strong>of</strong> market value <strong>of</strong> equity <strong>and</strong> book value <strong>of</strong> debt divided bythe book value <strong>of</strong> total assets, T80 is equal to one for the years before 1990 <strong>and</strong> zero otherwise. <strong>The</strong> durationdependency <strong>of</strong> hazard rate is captured by four dummy variables corresponding to four-year duration intervals. Lndenotes the natural logarithm.35

Table 4: Fixed effect models with Tobin’s q <strong>and</strong> Pr<strong>of</strong>itability, respectively, as dependentvariablePanel A: <strong>The</strong> natural logarithm <strong>of</strong> Tobin’s q as dependent variableM1 M2 M3 M4 M5 M6Family 0.008(0.29)0.093(2.01)**0.129(2.10)**0.018(0.62)0.099(2.10)**0.162(2.57)**Equity -0.203(-2.41)**-0.194(-2.25)**Excess Votes -0.224(-2.03)**-0.226(-2.01)**Family*Equity -0.235(-2.34)**-0.227(-2.27)**-0.223(-2.18)**-0.210(-2.06)**NonFamily*Equity -0.139(-1.43)-0.126(-1.31)-0.135(-1.37)-0.111(-1.15)Family*Excess Votes -0.365(-2.77)***-0.362(-2.74)***-0.363(-2.71)***-0.357(-2.67)***Non<strong>family</strong>*Excess Votes 0.223(1.36)0.225(1.38)0.208(1.26)0.212(1.31)Leverage -0.128(-1.80)*-0.132(-1.87)*-0.236(-3.43)***-0.240(-3.53)***Family*Leverage -0.178(-2.26)**-0.318(-4.21)***Non<strong>family</strong>*Leverage -0.049(-0.48)-0.095(-0.88)Ln(Firm Age) -0.146(-3.30)***-0.137(-3.03)***-0.134(-2.96)***-0.159(-3.58)***-0.149(-3.32)***-0.144(-3.22)***Ln(Firm Size) -0.062 -0.063 -0.062 -0.054 -0.055 -0.054(-2.15)** (-2.20)** (-2.16)** (-1.90)* (-1.94)* (-1.88)*Investment 0.235(2.75)***0.225(2.69)***0.225(2.69)***0.250(3.01)***0.241(2.94)***0.239(2.94)***Pr<strong>of</strong>itability 0.765(4.02)***0.770(4.03)***0.759(3.69)***Liquidity 0.073(0.80)0.037(0.41)0.032(0.35)0.071(0.85)0.041(0.46)0.032(0.35)Year Dummies Yes Yes Yes Yes Yes YesAdj R 2p-value <strong>of</strong> F-test for fixed effectsp-value Hausman Test0.6820.0000.0000.6840.0000.0010.6840.0000.0010.6720.0000.0000.6740.0000.0000.6750.0000.00036

Panel B: Pr<strong>of</strong>itability as dependent variableM1 M2 M3Family 0.013(2.28)**0.008(0.86)0.032(2.35)**Equity 0.011(0.70)Excess Votes -0.002(-0.12)Family*Equity 0.015(0.89)0.020(1.15)NonFamily*Equity 0.006(0.21)0.014(0.52)Family*Excess Votes 0.003(0.16)0.006(0.28)Non<strong>family</strong>*Excess Votes -0.019(-0.46)-0.018(-0.43)Leverage -0.141(-4.74)***-0.141(-4.71)***Family*Leverage -0.170(-4.72)***Non<strong>family</strong>*Leverage -0.086(-3.21)***Ln(Firm Age) -0.016(-1.82)*-0.017(-1.85)*-0.015(-1.65)*Ln(Firm Size) 0.010(1.27)0.010(1.27)0.010(1.34)Investment 0.020(0.77)0.020(0.79)0.020(0.77)Liquidity 0.004(0.14)0.005(0.18)0.002(0.06)Year Dummies Yes Yes YesAdj R 2p-value <strong>of</strong> F-test for fixed effectsp-value Hausman Test0.3990.0000.0000.3980.0000.0000.4020.0000.066Note: In this table we report fixed effect models with the natural logarithm <strong>of</strong> Tobin’s q (Panel A) <strong>and</strong>Pr<strong>of</strong>itability (Panel B) as dependent variables. Tobin’s q is defined as the sum <strong>of</strong> market value <strong>of</strong> equity <strong>and</strong>book value <strong>of</strong> debt divided by the book value <strong>of</strong> total assets. Pr<strong>of</strong>itability is equal to Earnings Before Interest,Taxes, <strong>and</strong> Depreciation (EBITD) divided by the book value <strong>of</strong> total assets. <strong>The</strong> sample consists <strong>of</strong> 200 firms<strong>and</strong> 1706 firm years. Coefficients are reported with heteroscedastic robust t-values in parenthesis. ***. **, <strong>and</strong> *denote significance at the 1%, 5%, <strong>and</strong> 10% level, respectively. Family is equal to one if the ultimate controllingshareholder is a <strong>family</strong>, an indivi<strong>dual</strong>, or a group <strong>of</strong> indivi<strong>dual</strong>s, <strong>and</strong> zero otherwise. Equity is defined as thecontrolling shareholder’s (largest voteholder) fraction <strong>of</strong> cash flow rights in the firm. Votes is defined as thecontrolling shareholder’s fraction <strong>of</strong> voting rights in the firm. Excess Votes is defined as Votes minus Equity.Firm Size is defined as the book value <strong>of</strong> total assets in Million SEK. Firm Age is defined as the number <strong>of</strong> yearssince the firm was founded. Investment is defined as total capital expenditure divided by the book value <strong>of</strong> totalassets. Leverage is equal to the value <strong>of</strong> long term debt divided by the book value <strong>of</strong> total assets. Liquidity isequal to the value <strong>of</strong> short term assets divided by the book value <strong>of</strong> total assets. Ln denotes the natural logarithm.37

Endnotes1 With <strong>dual</strong> <strong>class</strong> <strong>shares</strong> we mean <strong>shares</strong> with differential voting rights.2 Jarrell <strong>and</strong> Poulsen (1988) argue that <strong>dual</strong> <strong>class</strong> <strong>shares</strong> are used as antitakeover mechanisms. <strong>The</strong>y find negativeabnormal stock price returns at the announcement <strong>of</strong> <strong>dual</strong> <strong>class</strong> <strong>shares</strong> recapitalization in the U.S..3 A <strong>family</strong> member <strong>of</strong>ten acts as CEO in <strong>family</strong> controlled firms (La Porta et al., 1999).4 For the U.S. see e.g. Hasbrouck (1985) <strong>and</strong> Palepu (1986). For U.K. results, see e.g. Powell (1997).5 For the U.S. see e.g. Walkling <strong>and</strong> Long (1984), Walkling (1985), Morck et al. (1989), Mikkelson <strong>and</strong> Partch(1989), Ambrose <strong>and</strong> Megginson (1992, Song <strong>and</strong> Walkling (1993), Shivdasani (1993) <strong>and</strong> Comment <strong>and</strong>Schwert (1995) <strong>and</strong> Espahbodi <strong>and</strong> Espahbodi (2003). For U.K. results, see e.g. Weir (1997) <strong>and</strong> Sinha (2004).6 Sudarsanam (2003, p. 500) points out that factors such as corporate <strong>ownership</strong> structure <strong>and</strong> the absence <strong>of</strong> oneshare – one vote limit the incidence <strong>of</strong> hostile takeovers in many countries outside the U.S. <strong>and</strong> UK. He arguesthat “…negotiated <strong>and</strong> friendly bids are perhaps the most important, if not the only, bid strategy available…”All target firms in the non-partial takeovers in our sample have a large shareholder <strong>and</strong> large shareholders canblock a takeover in Sweden. Together with the fact that we only look at successful takeovers suggests that alltakeovers in our sample are friendly, i.e. the controlling shareholder did not block the takeover.7 <strong>The</strong> relation between <strong>dual</strong> <strong>class</strong> <strong>shares</strong> <strong>and</strong> the Swedish market for corporate control has been investigatedbefore by e.g. Rydqvist (1996), Doukas et al. (2002) <strong>and</strong> Holmen <strong>and</strong> Knopf (2004). However, none <strong>of</strong> thesestudies investigate the risk <strong>of</strong> takeover.8 <strong>The</strong> term ‘‘amenity potential,’’ suggested by Demsetz <strong>and</strong> Lehn (1985), refers to non-pecuniary privatebenefits <strong>of</strong> control. In our context it means utility to the families that does not come at the expense <strong>of</strong> firmpr<strong>of</strong>its.9 Burkart et al. (2003) model the succession in a <strong>family</strong> firm owned <strong>and</strong> managed by its founder. When decidingto hire a pr<strong>of</strong>essional manager or leaving control to his heir, the founder trades <strong>of</strong>f that a pr<strong>of</strong>essional is a bettermanager <strong>and</strong> the resulting agency costs associated with an outside manager.10 Acording to Becht <strong>and</strong> Mayer (2001), in 50% <strong>of</strong> the large Swedish companies more than 34.9 percent <strong>of</strong> votesare controlled by a single blockholder. In contrast, the median size <strong>of</strong> the second largest voting block is 8.7percent.11 A similar prediction can be generated based on Burkart et al. (1998) who show that in a takeover bid, minorityshareholders would prefer bidders to accumulate larger cash flow rights to deter them from post-acquisition38

private benefit extraction. In contrast, bidders would prefer to minimize their cash flow <strong>ownership</strong> whileaccumulating sufficient votes to control the firm in order to minimize the internalization <strong>of</strong> value consequences<strong>of</strong> post-acquisition rent extraction. In our context, the presence <strong>of</strong> a controlling shareholder with a large amount<strong>of</strong> voting rights relative to cash flow rights increases the chances <strong>of</strong> the bidder to attain her goals. Yet, this islikely to be anticipated by minority shareholders who would attempt to block a takeover attempt. <strong>The</strong> ease <strong>of</strong>blocking a non-partial takeover attempt in Sweden indicates that the likelihood <strong>of</strong> takeover is likely to beinversely related to the wedge between cash flow <strong>and</strong> voting rights <strong>of</strong> a controlling shareholder.12 Part <strong>of</strong> this data were provided by Kristian Rydqvist.13 Banks in 1990: Nordbanken, Skånska banken, Werml<strong>and</strong>sbanken, Skaraborgsbanken; Financial Institutions in1997: Stadshypotek, Trygg Hansa, Föreningsbanken, Östgöta Enskilda Bank; Information Technology firms in2000; Cell, Connecta, Entra Data.14 Operational control might be reached at e.g. 25 percent <strong>of</strong> the votes (see e.g. Cronqvist <strong>and</strong> Nilsson, 2003).15 In our sample, the median controlling shareholder in a <strong>dual</strong> <strong>class</strong> firm holds roughly equal amounts <strong>of</strong> A<strong>shares</strong> <strong>and</strong> B-<strong>shares</strong>.16 It is not uncommon that the high voting A-<strong>shares</strong> are not traded on the stock exchange. Non-traded <strong>shares</strong> havebeen assigned the market price <strong>of</strong> traded B-<strong>shares</strong> when calculating the total market value <strong>of</strong> equity. <strong>The</strong> votingpremium in Sweden is on average one percent (Nenova, 2003). However, Rydqvist (1996) shows that the votingpremium can be substantial at control contests. Even if we look at takeovers we collect market values at thebeginning <strong>of</strong> the year, i.e. not in connection with a takeover bid. Thus, assigning the market price <strong>of</strong> B-<strong>shares</strong> tonon-traded A <strong>shares</strong> should not bias the Tobin’s q estimate significantly.17 Note that mean differences are tested on the natural logarithm <strong>of</strong> Firm Size, Firm Age <strong>and</strong> Tobin’s q. <strong>The</strong> t-teston the mean differences in the natural logarithm <strong>of</strong> Firm Size indicates that firms being takeover targets arelarger than firms not being takeover targets even if average Firm Size per se is larger for firms not being takeovertargets.18 Consistent with the Holderness <strong>and</strong> Sheehan’s (1988) study <strong>of</strong> the role <strong>of</strong> majority shareholders in publiclyheld corporations for firms where the largest shareholder is a <strong>family</strong> or other group <strong>of</strong> indivi<strong>dual</strong>s, we don’tdistinguish between managerial <strong>and</strong> non-managerial shareholders (the vast majority <strong>of</strong> the <strong>family</strong> owners areinsiders).19 Bergström <strong>and</strong> Rydqvist (1990) used a similar principle for grouping Swedish shareholders into coalitions.39

20 Non-parametric specification for the duration dependency <strong>of</strong> the hazard rate tend to be more reliable thanparametric one because it does not tightly constrain the general shape <strong>of</strong> the baseline hazard function. Moreover,conclusions about the significance <strong>of</strong> unobserved heterogeneity are more reliably drawn when a flexiblespecification for the baseline hazard has been used.21 This is only possible if the interval-specific baseline hazard can be identified meaning that the durationinterval should contain events <strong>of</strong> takeover.22 Out <strong>of</strong> sample <strong>and</strong> unreported tests <strong>of</strong> the bid premium at 54 successful non-partial tender <strong>of</strong>fers <strong>of</strong> <strong>dual</strong> –<strong>class</strong>firms on the Stockholm Stock Exchange 1986-2004 suggest that the extra premium <strong>of</strong>fered on the A-<strong>shares</strong>(tender <strong>of</strong>fer price on A-<strong>shares</strong> above tender <strong>of</strong>fer price on B-<strong>shares</strong>) is negatively correlated with the tender<strong>of</strong>fer premium on the B-<strong>shares</strong> (<strong>of</strong>fered price on B-<strong>shares</strong> above market price). Thus, there appears to be asubstituting effect where the extra premium paid on the A-<strong>shares</strong> are taken from the premium on the B-<strong>shares</strong>.23 <strong>The</strong> models are estimated using pgmhaz8 procedure <strong>of</strong> STATA 8.2. For each specification, two models areestimated by maximum likelihood methods: (1) the Prentice-Gloeckler (1978) model; <strong>and</strong> (2) the Prentice-Gloeckler (1978) model incorporating a gamma mixture distribution to summarize unobserved indivi<strong>dual</strong>heterogeneity, as proposed by Meyer (1990). We estimate fully non-parametric specification for the baselinehazard with four interval-specific baseline hazards.24 Being the largest voteholder, the incumbent will capture all or most <strong>of</strong> any premium the bidder is willing topay for the control rights, i.e. the private benefits. <strong>The</strong> incumbent will capture the whole control premium if heholds all A-<strong>shares</strong> (40 percent <strong>of</strong> the <strong>dual</strong> <strong>class</strong> firms). <strong>The</strong> incumbent will capture most <strong>of</strong> the control premiumif there are other shareholders holding A-<strong>shares</strong> since the bidder is not allowed to price discriminate betweendifferent holders <strong>of</strong> A-<strong>shares</strong>. <strong>The</strong> median controlling shareholder in the <strong>dual</strong> <strong>class</strong> firms holds 75 percent <strong>of</strong> theA-<strong>shares</strong>. <strong>The</strong> median Excess Votes is equal to 0.29 (0.14) if the controlling shareholder holds (does not hold) allA-<strong>shares</strong>. <strong>The</strong> correlation between Excess Votes <strong>and</strong> the indicator variable for the controlling shareholderholding all A-<strong>shares</strong> is 0.45.25 We do not report the coefficients <strong>of</strong> non-parametric baseline hazard.26 <strong>The</strong> Family*Excess Votes variable only captures to what extent the <strong>family</strong> has voting rights in excess <strong>of</strong> cashflow rights. It does not capture how concentrated the <strong>ownership</strong> really is, i.e. even if the <strong>family</strong> holds 5 percentor 50 percent <strong>of</strong> the firm’s cash flow rights, Excess Votes can be 0.2.40