Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 96: Institutional Owners and the Return on Investments

Per-Olof Bjuggren (), Johan E. Eklund () and Daniel Wiberg ()
Additional contact information
Per-Olof Bjuggren: JIBS and CESIS
Johan E. Eklund: JIBS and CESIS
Daniel Wiberg: JIBS and CESIS

Abstract: Examining a large number of Swedish listed firms, this paper analyses how institutional owners affects the investment decisions and firm performance. During the last decades the ownership structure of Swedish firms has undergone dramatic changes: institutional and foreign investors have been increasing their stakes, whereas Swedish households have decreased in importance. Controlling owners, often founding families, remain in control by resorting to an extensive use of dual-class shares. To measure investment performance Mueller and Reardon’s (1993) marginal q is used. Marginal q measures the ratio of the return on investments to the cost of capital. We find that institutional and foreign owners positively influence the performance of firms. Furthermore a non-liner relation between ownership concentration and performance is found. This is consistent with positive incentive effects and negative entrenchment effects. The practice of dual-class shares which separate cash-flow rights and control rights is also found to be an important determinant of firm performance.

Keywords: marginal q; investment returns; institutional owners

JEL-codes: C23; G30; K22; L25

31 pages, September 6, 2007

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