Assignment
Read the case notes below and consider the data shown in the appendix.
Determine how this information can be used to shed light on the impact of equity ownership on company performance.
Then write a report for the Directors of JPD which addresses these issues.
Remember, the Directors of JPD are not experts in statistical analysis. Hence you will need to explain what you are doing and why, as well as the meaning of your results.
In structuring your report you may wish to consider the following framework. This does not mean that you simply respond to (a) to (d) below, but rather that you formulate headings and sub-headings for your briefing note using the framework as a starting point.
(a) A graphical representation of the data and a discussion of any issues or patterns which arise from this exercise. You need to decide upon the exact data to use and the appropriate graph(s).
(b) Univariate (single variable) and bivariate (two variable) analysis and discussion which considers the links between equity ownership and company performance.
(c) Multivariate (multiple variable) analysis and associated discussion which makes use of the data shown in Appendix I.
(d) Any other issues, problems or additional complications which you feel should be conveyed to the Directors of JPD with respect to your analysis.
Equity Ownership and Company Performance
You have recently been appointed as an analyst within PMC Inc. PMC is a UK consultancy company that undertakes independent research for client organisations.
Your first client is a large investment management firm (JPD) which provides advice and administrative services to both individuals and companies in relation to portfolio selection and specific asset purchase (stocks, bonds, etc.).
The Directors of JPD are interested in determining the impact which equity ownership has on company performance. In particular, the extent to which the separation of ownership and control provides opportunity for managers to undertake activities which negatively impact on performance and whether large shareholders can put pressure on managers to increase this performance.
You have been asked to undertake some quantitative analysis looking at this issue. While you are familiar with various different aspects of statistics and a number of statistical packages you have not undertaken a project of this nature before. Hence you start by conducting a literature search.
This search proves beneficial and you find that there are a number of existing studies which look at equity ownership and firm performance, although none specifically in a UK context.
In terms of theoretical work one of the overarching themes is that of the principal/agent problem. This suggests that the owners of a firm will want to pursue profit or value maximisation, but that on many occasions share ownership is so dispersed that the ability of shareholders to push managers in this direction is extremely limited. In contrast managers will have other objectives such as ‘empire building’ or a quest for higher salaries, with pursuit of these alternative objectives being possible (at the expense of profit) because control cannot be exerted by shareholders. This implies that in situations where equity ownership is not dispersed and instead resides to a large extent in the hands of a single organisation or individual then it should be possible to force managers to pursue value maximisation. However, there is also the suggestion that some of the owners of a company may have objectives other than maximum value.
In terms of empirical work there have been a number of studies which have attempted to look at the impact which ownership concentration (percentage shares of the largest owner) has on performance. Various measures of company performance have been used including accounting profit, market to book value and return on capital employed. In addition, some studies have looked at whether the identity of the largest owner (bank, institutional investor, etc.) has an effect on these performance measures. All such studies also contain ‘control variables’ which are likely to impact on company performance. The most frequently used of these is firm size. In addition, some studies have attempted to control for the industry in which the firms are located.
From the material you have identified you draw up a list of variables which can be used to identify the impact, if any, of equity ownership on performance. You then collect numerical data on each of these variables (details of the data can be found in Appendix I).
You now need to consider how you will analyse this information. In addition you need to consider how you will explain the approach(es) you have adopted and the implication of your analysis given that the Directors of JPD are not experts in quantitative or statistical methods.
Appendix I
The data for this assignment can be found in the file EO1.XLS . This information relates to a large sample of medium and large sized firms. In total there are 350 observations. The first 6 observations are shown below.
Variable definitions:
MBV: Market to book value.
Identity: Identity of the largest owner:
3 if bank,
4 if institutional investor,
5 if non-financial company,
6 if family or single person.
Con: Ownership concentration, percentage shares of the largest owner.
Size: Total assets of company, £ million.
ROCE: Return on capital employed, percent.
Industry: Sector in which company operates:
1 if manufacturing,
2 if services,
3 if primary.
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