2007: a Canadian corporate ownership survey.

• Author: Valsan, Calin
• Position: Report

1. Introduction

   This present study employs a very recent and large sample of TSX listed firms and aims to re-evaluate the empirical evidence on corporate ownership in Canada. It is shown here that blockholding remains rather common, yet the widely-held firm has become more prevalent over the last ten years (3). Regional disparities persist, but unlike previous studies that single out Quebec, this one finds that Eastern Canada as a whole (including Quebec) displays a more pronounced tendency towards concentrated ownership. We define blockholders as shareholders who control 10% or more of the total votes of the firm. A footnote on CEO compensation suggests that pay-performance is lower for closely held firms and for very large firms as measured by the size of their assets. Previous studies have interpreted their findings mainly by making reference to law regimes, taxation, and corporate governance regulation. Here, we acknowledge the insight of Bebchiuk and Roe (1999) with respect to path dependence, and we conjecture an explanation based on the eclectic interaction among economic, political, geographic, cultural, and institutional factors.

   This study is organized as follows. Section two provides a brief discussion of the literature. Data is presented in section three. Empirical results are presented in sections four through eight. A brief discussion and interpretation of results is provided in sections nine. Section ten concludes.

2. The Current Record on Corporate Ownership in Canada

   The commentators of Canadian economic history have always noted the concentration of economic power in the hands of a small yet influential elite. This view made its way into mainstream culture through the works of historians, such as Naylor (1975), Bliss (1986), Nome and Owram (1991), and Taylor and Baskerville (1994), and through the accounts published by columnists such as Peter C. Newman (1977, 1991, and 1998) and Diane Francis (1986, 2008).

   Recently, a handful of academic studies provide a systematic review of the empirical evidence on Canadian corporate ownership. This line of research has emerged in the 1990s, and builds on the increasing interest shown towards the understanding of various systems of corporate finance within the larger framework provided by legal systems, culture, tradition, and religion. La Porta et al. (1998, 1999) provide two landmark studies; the authors attempt to tally and compare various corporate governance arrangements around the world. The primary motivation of this approach was to raise awareness that outside the United States and Britain the modern corporation did not quite match the widely-held ownership model advanced by Adolf Bearle and Gardiner Means (1932), and popularized by John Kenneth Galbraith (1971) and Alfred Chandler (1977); hence, many corporate governance scholars set out to document and debate this intriguing state of affairs [Zingales (1994), Schleifer and Vishny (1997), Becht and Roell (1999), Claessens et al. (2002), Faccio and Lang (2002), Anderson and Reeb (2003), Denis and McConnell (2003), Nenova (2003), Stulz and Williamson (2003), and Dyck and Zingales (2004)].

   La Porta et al. (1999) report high ownership concentration for a small sample of Canadian corporations. Using data from the same historical period, Gadhoum (2006) and Bozec and Laurin (2004 and 2006) confirm these findings. About 60% of Canadian firms publicly traded in the mid-1990s have ownership stakes of 20% or higher. These two latter studies warrant our close attention because they take a more nuanced look at regional ownership structures. There appears to be a certain degree of differentiation between Quebec and the rest of the country. Up to 80% of Quebec firms show ownership stakes at the 20% cut-off. These regional differences are attributed to the particularities of the civil law regime, following the insights provided by La Porta et al. (1998). Bozec and Laurin (2006) note that Quebec firms are subject to conflicting regulation: they must comply with both provincial and federal corporate laws. While the Canada Business Corporations Act is very similar to other common-law legislation in terms of investor protection, the Companies Act of Quebec is less stringent than its federal counterpart.

   Morck et al (2000) associate the concentration of ownership with lower productivity growth and sub-par economic performance. They even coin a new term for this predicament, calling it the "Canadian disease." There are several other similar studies that analyze corporate performance in relation to ownership. [Eckbo and Thorburn (2000), Andre et al. (2006), and Ben Amar and Andre (2006)].

   A concise, yet insightful historical account of corporate ownership in Canada is provided by Morck et al (2003). The authors make several contentions that elucidate to some extent the nature of Canadian capitalism. First, Canadian corporations have their roots in a tradition of mercantilism going back to the colonial era predating the Confederation. Second, domestic taxation of inheritances played a major role in the rise and subsequent decline of the widely-held firm. Third, the re-emergence of the mercantilist state in the 1970s in the form of Trudeau-style dirigisme has favored closely-held over widely-held firms because the former category proved more apt in dealing with the omniscient government bureaucracy. Under the cover of promoting a marked nationalistic agenda (which has long been a part of the Canadian political discourse), the capitalist elite re-asserted its control over the Canadian economy in exchange for support for the welfare state. In the end, Morck et al (2003) muse over the apparent quandary surrounding Canadian corporate ownership: pyramids and concentrated ownership structures are usually associated with developing countries and low-trust economic settings, because they supplant investor rights and reduce the scope for other moral hazards. Canada is not, however a developing country. The quality of its institutional framework is as good as in UK, for example, yet corporate ownership patterns are dramatically different [Attig and Gadhoum (2003)]. One has to conclude that the only explanation one could advance here pertains to the nature of private benefits of control associated with large shareholders [Barclay and Holderness (1989)].

   Citing several regulatory anachronisms, Morck and Yeung (2006) plead for a substantial reform of corporate governance in Canada. The authors blame the dividend tax regime, dual-class shares, and other regulation causing a substantial incongruence between cash flow and control rights. As such, corporate governance in Canada is at grips with two types of agency conflicts: one pitting managers against shareholders, and the other pitching blockholders against smaller shareholders.

   There is no doubt that globalization and financial liberalization must have certainly played an important role in increasing the awareness of and curiosity towards comparative corporate governance systems. A majority of studies cited earlier would have not been possible a quarter of a century ago. World-wide liberalization of trade and finance has contributed to a relative convergence of economic systems. Paradoxically, this increase in openness has brought to the fore the glaring differences that remain among various systems of corporate finance. A certain leveling of the playing field has lightened the task of studies endeavoring to identify salient factors that make a difference in corporate governance.

   Most studies on Canadian corporate ownership use 1996 data. The size of the samples used is rather small, with one notable exception [Gadhoum (2006)]. Studies employing data collected before or during 1996 might have missed some of the timelagged effects induced by the latest wave of financial liberalization and economic globalization that started in earnest in the early 1990s. It is only legitimate to presume that these trends might have had a conspicuous impact on Canada. As it will be shown later, our main results corroborate earlier findings, but also reveal a trend towards an increase in wider-held ownership across the board.

3. Data

   The sample used here consists of 1,452 firms listed on the Toronto Stock Exchange in the spring of 2007. The data include financial, ownership, and various corporate governance information.

   Financial information pertains to total assets, liabilities, revenue, and market capitalization. The sources of data are the most recent annual reports (end of 2006) filed with the Ontario Securities Commission, provided by the System for Electronic Document Analysis and Retrieval (SEDAR). Total and long-term debt ratios are estimated by dividing total debt and long-term debt respectively by total assets. Sales to assets ratios are calculated by dividing annual sales by total assets. ROA and ROE is calculated by dividing net income by total assets and owner's equity. Average market capitalization is estimated by taking the average of the previous 52 weeks low and high stock prices, multiplied by the number of outstanding shares. Market-to-book ratios are calculated by dividing average market capitalization by owner's equity.

   Data on ownership is obtained from the most recent management proxy circular. This circular usually indicates the significant blockholders and the size of their stake. Blockholders are shareholders who control 10% or more of the total votes of the firm. We need to know who owns 10% or more of total votes in order to calculate cumulative blockholder (ownership) stakes. Cumulative blockholder (ownership) stakes are estimated by adding the votes of all blockholders in each firm. For example, if a firm has two blockolders controlling 13% and 16% of votes respectively, then cumulative blockholder ownership equals 29%.

   While it is usual to use both 10% and 20% cutoff points as thresholds of cumulative ownership concentration, here we focus only on the 20%...