Ownership concentration and investment performance of Austrian listed companies

Afgan, Nouman; Mumtaz, Muhammad Zubair; Kunst, Robert M. Article Ownership concentration and investment performance of Austrian listed companies PSL Quarterly Review Provided in Cooperation with: Associazione Economia civile, Rome Suggested Citation: Afgan, Nouman; Mumtaz, Muhammad Zubair; Kunst, Robert M. (2024) : Ownership concentration and investment performance of Austrian listed companies, PSL Quarterly Review, ISSN 2037-3643, Associazione Economia civile, Rome, Vol. 77, Iss. 311, pp. 511-529, https://doi.org/10.13133/2037-3643/18179 This Version is available at: https://hdl.handle.net/10419/324123 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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To view a copy of this license visit http://creativecommons.org/licenses/by-nc-nd/4.0/ vol. 77 n. 311 (December 2024) Ownership concentration and investment performance of Austrian listed companies NOUMAN AFGAN, MUHAMMAD ZUBAIR MUMTAZ, ROBERT M. KUNST Abstract: We apply panel estimation techniques to full population of Austrian corporations from 2007-2020 in order to analyze the impact of ownership concentration on performance. Return on investment (ROI) is lower than cost of capital, which insinuates that managers invest beyond optimal investment level instead of maximizing shareholders’ wealth. ROI for pyramidal firms is 35% lower than cost of capital implying that managers pursue their objectives. State-owned firms’ ROI is 28% lower than cost of capital showing that discretionary investments lead to suboptimal performance. An inverted U-curve is estimated with a turning point at 69% voting rights, beyond which entrenchment effect dominates the incentives effect for 37% firms. This evidence confirms minority shareholders’ expropriation, which has repercussions for efficient governance in Austrian corporations. Afgan: Hajvery University and Government College University (Lahore, Pakistan), email: nouman.a[email protected] Mumtaz: University of Bahrain and NUST (Islamabad, Pakistan), email: mmumt[email protected] Kunst: Institute of Advanced Studies and University of Vienna, (Austria), email: [email protected] How to cite this article: Afgan N., Mumtaz M.Z., Kunst R.M. (2024), “Ownership concentration and investment performance of Austrian listed companies”, PSL Quarterly Review, 77 (311), pp. 511-529. DOI: https://doi.org/10.13133/2037-3643/18179 JEL codes: L2, G3 Keywords: ultimate ownership, marginal q, return on investment, incentives effect, entrenchment effect Journal homepage: http: //www.pslquarterlyreview.info Analysis of the effects of ownership concentration on corporate investment performance has been an important strand of the literature since the pioneering work of Morck et al. (1988). In a sample of large US companies, they found that Tobin’s 𝑞 displays a non-monotonic reaction to managerial shareholdings: a positive association holds for managerial shareholdings up to 5%, while between 5% and 25% a negative relation dominates; thereafter, a positive relationship takes over once more. Their analysis interpreted the positive part of the relation as being consistent with incentives becoming more and more aligned between outside shareholders and managers, i.e. managerial shareholdings overcome the problem of the separation of ownership and control. However, if managers begin to hold a substantial stake in the company, it is nearly impossible to replace them. Thus, there is a range of their shareholdings where they destroy more value than they add – at which point, they become entrenched. Analyzing the impact of ownership concentration on investment performance is important for countries with strong corporate governance regimes. It is all the more important for Austria, a developed economy in Western Europe, which has a Germanic insider corporate governance system, with two-board systems in place in Austrian Corporations (see Gugler et al., 2003 for a Article 512 Ownership concentration and investment performance of Austrian listed companies PSL Quarterly Review detailed discussion on insider and outsider corporate governance systems). If entrenchment effects and private benefits of control are reasonably low, small minority shareholders will invest in the shares of listed companies. Only if capital market institutions properly protect them against managers will external capital markets grow. This study analyzes the impact of ownership concentration on the investment performance of all non-financial companies listed on the Vienna Stock Exchange. This is the first study that comprehensively analyzes corporate investment performance employing the entire population of all non-financial Viennese listed firms. In the microeconomic framework, managers have their own goals such as increasing the growth and size of the firm. They wish to pursue these goals even when it harms their shareholders (Marris, 1998). The firm’s manager or the largest shareholder has discretion in allocating their internal cashflows. While investing they choose this source of finance over external sources i.e. bank loans or equity offerings (Jensen, 1986). For the full population of all non-financial companies listed on the Vienna Stock Exchange, we ask how corporate investment affects the corporation’s market value. In this study we exploit the time series variation in ultimate ownership to control the endogeneity problem of structural reverse causality by estimating firm fixed effects and random effects regressions (see Demsetz and Lehn, 1985). We measure performance using a marginal q that has been derived from the micro theory of the firm. Marginal q is a marginal return on a firm’s investment. It is defined as the ratio of return on investment to the cost of capital. It is more adequate for dealing with reverse causality than alternative approaches that use average performance measures such as return on assets or market to book value that confound infra-marginal and marginal returns and are not ideal for analyzing agency problems (see Demsetz and Lehn, 1985). The concept of marginal 𝑞 allows us to estimate a causal relationship between ownership concentration and performance, which runs from the former to the latter. Our research paper analyzes the ownership structures of the entire population of nonfinancial companies listed on the Vienna Stock Exchange. It is the first study for Austria that examines the relationship between ownership concentration and investment performance measured by a marginal 𝑞, by employing data from 2007-2020 for all non-financial companies listed on the Vienna Stock Exchange. The empirical analysis establishes a non-linear relationship between marginal 𝑞 and concentration of voting rights, which is an inverted U-curve with a turning point at 69% concentration, in contrast to the diagram with two turning points drawn by Morck et al. (1988). The steep downward sloping part of the curve presents reasonably strong evidence of entrenchment. This article is organized as follows. Section 1 gives an overview of the literature on the interaction of ownership concentration and performance. Section 2 presents our hypothesis. Section 3 focuses on determining ultimate ownership. Section 4 presents the methodology used for measuring performance and the equation for estimating the effects of ownership concentration on performance. In section 5, we describe the sources of information and report the descriptive statistics for variables used in the regression analysis. Section 6 comprises panel-data analyses of the impact of ownership concentration on performance. Conclusions are drawn in the final section. 1. Literature review Tobin (1969) illustrated the (schematic) capital account approach for a closed economy. A row may be labeled as demand deposits or producers’ durable equipment in his general accounting N. Afgan, M.Z. Mumtaz, R.M. Kunst 513 PSL Quarterly Review framework. In contrast, columns represent sectors of the economy that are constrained by their own wealth. Commercial banks, central banks, non-bank financial institutions, and the general public are examples of sectors. In this approach, financial policies and events mainly affect aggregate demand by changing the valuations of physical assets relative to their replacement costs. Monetary policies can accomplish such changes, but other exogenous events can too. Hayashi (1982) analyzes US corporations and finds that investment is a function of marginal 𝑞 (the ratio of market value of an additional unit of capital to its replacement cost). He tests the conjecture put forward by Tobin and derives the optimal rate of investment as a function of marginal 𝑞 adjusted for tax purposes. The ratio of corporate investment to the total capital stock at replacement cost is regressed on marginal 𝑞 over 1953 to 1976, which gives a positive coefficient on marginal q. The analysis shows that marginal 𝑞 and average 𝑞 (the ratio of market value of capital to its replacement cost) are the same under the conditions that the firm is a price taker and the production and installation functions are homogenous. Hoshi et al. (1991) present evidence from Japanese companies, which is consistent with the view that information and incentive problems in the capital market have important effects on corporate investment. They hypothesize that group firms are not subject to asymmetric information problems when financing their investments because other group members have access to information. The sample is divided into 176 independent and 121 group companies based on the refinement made by Nakatani (1984) of the Keiretsu no Kenkyu’s classification that focuses on a company’s financial ties with its group’s financial institutions. Tobin’s 𝑞 (ratio of the market value of total assets of the company and book value) is used as a proxy for investment prospects. The dependent variable is depreciable assets divided by the capital stock. Cash flow, the measure of liquidity, only has a positive significant coefficient in the investment equation for independent companies. Contrary to the over-investment hypothesis that predicts a negative coefficient for both interaction terms, the difference between liquidity coefficients of group companies and non-group companies is larger for high Tobin’s 𝑞 firms. Walker (2001) explores the effect of group membership on the investment policies of Japanese companies. In order to analyze the determinants of investments, he uses a large sample of Japanese companies from 1993-1998. The investment of horizontal group members is less sensitive to growth opportunities and more sensitive to operating cash flow than the investment of independent firms. The measure of investment efficiency used is the product of the relative investment level and growth opportunities. The Keiretsu provides strong evidence that industrial groups in Japan transfer capital between members. The investment patterns of Japanese group companies appear to be similar to the evidence of investment patterns in US conglomerates. According to Ganchev (2013), the monetary circuit theory was the Keynesian thought regarding the circulating flow of goods and services in the economy. Generally, the characteristics of the previous studies in the theory of monetary circulation comprise money as a function of circulation, initiation, and devastation of money as an endogenous process by the real economy, and the capability of the banks to create money. The probable feature of this theory is the transition from micro to macro level (Arena and Salvadori, 2003). This implies that the neoclassical paradigm shift is associated with individual supply and demand, and monetary circuit theory, explain that the construction of socioeconomic groups may have different relationships with the banking industry. According to the investment literature, there is a hierarchy of finance in firms’ financing patterns. Firstly, firms use cash flows to finance investments. Secondly, they take on debt, and finally they approach the equity market. Myers (1983) reports that US companies rely heavily on 514 Ownership concentration and investment performance of Austrian listed companies PSL Quarterly Review internal funds and debt to finance their investments. Myers (2002) reviews capital structure theories; pecking order theory, agency theory, capital structure irrelevance, and trade-off theory. Fazzari and Hubbard (1988) tested the asymmetric information hypothesis by basing their test solely on the financial constraint part of the hypothesis. They divided the sample of 422 US companies into low, medium, and high retention ratio sub-samples, and used them to estimate cashflow-investment equations, which also included Tobin’s 𝑞 to analyze differences in investment opportunities. Mueller and Yurtoglu (2000) estimate marginal 𝑞’s on investments from cash flow, debt and equity offerings for a large sample of companies from 38 countries. They categorize countries by origins of legal systems and report that marginal 𝑞 on reinvested cash flows is lower than 1 for some countries from all types of legal origins. In these cases, investments from internal cash flows yield the worst performance. For other countries, again from various kinds of legal origin, marginal 𝑞’s on debt and equity are equal to or greater than 1. In these cases, this holds for investments out of debt. On the whole, countries with English-origin legal systems tend to perform better than others. Thus, external capital markets are effective in forcing managers to earn marginal 𝑞’s on debt and equity equal to or greater than 1. Franks and Mayer (2001) report very high levels of concentration of ownership in German corporations, particularly associated with holdings by other companies and families. The complex ownership patterns involve pyramidal structures. They ask whether distinctive ownership characteristics are associated with effective corporate governance or exploitation of private benefits of control. Although there is no hostile takeover market in Germany, there is a substantial market in share stakes that superficially bears close resemblance to an Anglo-American market for corporate control. However, it differs in two crucial respects. Firstly, it allows price discrimination between sellers of share blocks and other investors and, secondly, the overall gains to merger as reflected in bid premia are low in relation to those in the UK and US. The modest gains to changes in ownership are mirrored in board turnover that is low as compared to takeovers in the UK and US, suggesting that control benefits for ownership changes in Germany are comparatively small. Marris (1998) reports that managers pursue excessive growth of firms even when it harms the interests of the shareholders (see also Kathuria and Mueller, 1995). Gugler (1998) analyzes the ownership structures of the 600 largest Austrian non-financial corporations. Comparing concentration of ownership across European countries reveals that ownership concentration in Austria is particularly high. Pyramiding leads to separation of ownership and control, state-controlled pyramids and bank-controlled pyramids may suffer from insufficient monitoring. Control in the domestic investor categories, banks, the state, and families/individuals reduces firm profitability significantly. Although foreign control increases firm profitability, state control is particularly detrimental to shareholder wealth maximization. From this perspective ownership concentration seems excessive in Austria. According to the author, a more developed capital market, especially a more developed stock exchange would surely help in the efficient financing and governing of Austrian corporations. Gugler et al. (2004) analyze the effect of corporate governance institutions and ownership structures on investment performance by using a sample of more than 19000 companies from 61 countries. They use marginal q to measure performance and show that legal system origin is the most important determinant of performance. Companies in countries with a legal system of English origin earn at least as much as their costs of capital. However, companies in countries with civil law systems earn returns on investment below their costs of capital. Differences in N. Afgan, M.Z. Mumtaz, R.M. Kunst 515 PSL Quarterly Review performance that are related to a country’s legal systems dominate differences related to ownership structures. Mueller (2006) emphasizes the need for strong corporate governance institutions to facilitate the creation of thick equity markets in developing countries. Managers of companies in developing countries in Southeast Asia have more discretion to make bad investments from debt and equity offerings because corporate governance institutions are weaker in developing than in developed countries. Sometimes, growth maximizing managers of companies in developing countries in Asia use excessive equity to finance questionable investments. Thus, investors in Southeast Asia are willing to invest in the shares of listed companies without sufficient regulatory protection. Farooque et al. (2007) analyze a sample of 73 Bangladeshi listed companies. They report an S-shaped non-linear relationship between board ownership and performance, with entrenchment dominating for small and for large ownership ratios, essentially a mirror image of the function reported by Morck et al. (1988). However, the non-linear reaction disappears when they apply a two-stage least squares estimation procedure that takes care of potential ownership endogeneity. Kumar (2008) analyzes ownership structures and performance of Indian companies from 1994 to 2000. He estimates a U-curved relationship between directors’ shareholding and performance. Khwaja and Mian (2005) report evidence of manipulation of stock prices by collusive stockbrokers. A significant part of the stock market turnover reflects manipulative practices. They recommend the implementation of good governance and other laws to strengthen the equity markets. Afgan et al. (2017) analyze the ownership structures of 125 Pakistani listed companies from 1997 to 2007. Pakistan’s corporate governance is weak and unable to protect minority shareholders from expropriation by dominant largest shareholders. Strong evidence shows that return on investment compared to the cost of capital is below 1 for Pakistan. Return on reinvested cash flow is less than the cost of capital for Pakistan, which provides evidence of the hypothesis that the largest shareholders or managers exercise discretion while reinvesting cash flows, which leads to sub-optimal performance. The analysis reveals that financial institutions in Pakistan are confounded with asymmetric information while lending to firms. Due to the weak governance regime, financial institutions often cannot sell collateralized assets pledged by delinquent borrowers. Jin and Park (2015) analyze how the separation of cash flow and voting rights affects the performance of firms affiliated with large family business groups. Analyzing data from Korean Chaebols from 2003 to 2010, they find that the separation of cash flow and voting rights positively affects accounting performance but not market performance. Blanca et al. (2010) analyze insider ownership and firm performance of Spanish listed firms. They employ a large sample of Spanish listed companies for investigating the effect of insider ownership on performance and provide evidence of the convergence of interests and entrenchment effect. The empirical analyses suggest that insiders of Spanish family firms become entrenched at higher ownership levels. Hamadi (2010) explores the relationship between ownership of controlling shareholders and firm performance of Belgian listed companies from 1991 to 1996. Firm performance is measured by Tobin’s 𝑞. In her study, Tobin’s q is regressed on largest shareholder’s concentration, firm size & age, leverage, and research and development. She finds that large shareholders in family-owned firms have a positive effect on performance. The analysis shows that the largest shareholders have a negative effect of performance and the presence of a second shareholder has no impact on performance. 516 Ownership concentration and investment performance of Austrian listed companies PSL Quarterly Review Tran and Le (2020) analyze the relationship between ownership concentration and performance for Vietnamese listed companies. They find a positive relation between ownership concentration and the riskiness of profitability. This finding is consistent with the argument that large shareholders owning controlling equity stakes promote the firm’s risk-taking activities by weakening the strategic roles of risk-averse managers. In Vietnam’s weak institutional framework, this empirical evidence advocates that private benefits appeal to dominant shareholders and encourage them to engage in risk-taking activities at the expense of minority investors. Pasko et al. (2020) analyze ownership concentration and performance of agro-industrial companies in Ukraine. They have found no significant relationship between ownership concentration and performance, which is measured by EBITDA, profit before tax, and Tobin’s 𝑞. To synthesize the findings of the reviewed literature on ownership concentration and investment performance, Morck et al. (1988) estimated an up-down-up relationship between ownership concentration and Tobin’s 𝑞 for 371 Fortune 500 companies in the USA. Analyzing US corporations, Hayashi (1982) argues that marginal 𝑞 and average 𝑞 (the ratio of market value of capital to its replacement cost) are the same under the conditions that the firm is a price taker and its production and installation functions are homogeneous. For the United Kingdom, Short and Keasey (1999) report a non-linear relationship between ownership concentration and corporate investment performance. Cable (1985) is of the view that banks are most important in corporate governance in Germany. Franks and Mayer (2001) report very high levels of concentration of ownership in German corporations, particularly associated with holdings by other companies and families, and complex patterns of ownership. For Japan, Hoshi et al. (1991) analyze information and incentive problems in the capital market. Employing cash flow and short-term securities as measures of liquidity, they find that cash flow has a positive coefficient only in the investment equation for independent companies. An important finding is that the difference between liquidity coefficients of the group and nongroup companies is larger for firms with high Tobin’s 𝑞. Walker (2001), analyzing a large sample of Japanese listed companies, finds that investment of horizontal group members is less sensitive to growth opportunities and more sensitive to operating cash flow than is the investment level of independent firms. According to his research, the Japanese Keiretsu provides strong evidence that industrial groups in Japan transfer capital between members. Jin and Park (2015) analyze Korean Chaebols and find that separation of cash flow and voting rights positively affects accounting performance. For Belgium, Hamadi (2010) found that large shareholders in family-owned firms have a positive effect on performance. Pasko et al. (2020) found no significant relationship between ownership concentration and performance of Ukrainian agro-industrial firms, which is measured by EBITDA, profit before tax, and Tobins q. There are very few studies on Austria such as Pfaffermayr (1999) and Nieto (2021) that employ samples of listed companies to analyze corporate governance in Austrian corporations. There is no exclusive study for Austria that uses a marginal q to estimate the effects of ownership concentration on investment performance employing the whole population of non-financial companies listed at the Vienna stock exchange. N. Afgan, M.Z. Mumtaz, R.M. Kunst 517 PSL Quarterly Review 2. Hypothesis The managerial discretion hypothesis (MDH) postulates that managers of firms pursue their own objectives instead of maximizing the wealth of shareholders. Managers’ own objectives are to increase the size or growth of their companies, even when growth is harmful to their shareholders (Marris, 1998). The pursuit of excessive growth is detrimental to shareholders. According to the MDH, managers could conceal the nature of investments in the firm for maximizing their own value (Yurtoglu, 2006). Therefore, they have tendencies to invest beyond the optimal level of investment. This leads us to the following hypothesis: investment performance is hypothesized to be a function of largest ultimate shareholders’ voting rights concentration. 3. Ownership structures The ownership of Austrian listed companies is highly concentrated: concentration of ownership is evident from table 1, which reports the direct and ultimate ownership in Austria. The ownership structure of OMV AG is illustrated in figure 1. Figure 1 – Ownership Structure of OMV AG, Vienna OMV AG Mubadala Petroleum and Petrochemicals Holding Co. LLC 24.9% Dispersed shareholdings 43.1% Osterreichische Bundesund IndustrieBeteiligungen GmbH 31.5% Foreign owners 100% Republic of Austria 100% 518 Ownership concentration and investment performance of Austrian listed companies PSL Quarterly Review The largest direct shareholder of OMV AG is Oesterreichische Bundesund Industriebeteiligungen GmbH that has shareholdings of 31.5%. Oesterreichische Bundesund Industriebeteiligungen GmbH is fully owned by the state. The largest ultimate shareholder of OMV AG is the state. Mubadala Petroleum and Petrochemicals Holding Co. LLC, United Arab Emirates, a foreign entity has shareholdings of 24.9%. Table 1 reports the ownership concentration by the identity of the largest direct and ultimate shareholders. The variable ownership expresses the mean (median) of ownership whenever these entities are largest direct shareholders. Table 1 – Direct ownership and ultimate ownership panels Direct ownership panel Ultimate ownership panel Largest direct shareholders Largest ultimate shareholdersa Ownership Votingb Rights (𝑉𝑅) Companiesc Ownership identity Mean Mean Median SD Number (N) % age Listed companies 57.88 Holding companies 51.46 Families 25 44.24 38.47 24.21 14 52 State 31.50 48.38 40 22.28 3 11 Financial institutions 10.25 20.25 20.25 – 2 7 Foreign 54.56 68.24 72.35 25.92 8 30 Total 52.45 52.03 51.87 24.85 Notes: This table presents the ownership and control structures of Austrian listed companies. a Ultimate shareholders of 3 firms in the sample are dispersed shareholders. b We do not report cash flow rights in tabular form because of a minimal deviation of cash flow rights from voting rights. c N represents the number of ultimately-controlled firms by each of the largest ultimate shareholders like state, families, foreign, and financial institutions. Table 1 illustrates that ultimate ownership is a more meaningful concept than direct ownership. By tracing the ownership links across the multiple layers of a Pyramidal Ownership Structure, we can ascertain the identity of the largest ultimate shareholder along with the respective voting rights in the firm. As compared to direct ownership, it is more meaningful to know that the largest ultimate shareholder is a family or state or foreign-owned entity (see Almeida and Wolfenzen, 2006). The median of largest ultimate shareholders’ voting rights concentration is 51.87 %. Austria has a bank-based financing system. Concentration of ownership is an important feature in bankbased systems of finance. Pyramidal structures are very common in bank-based systems as they allow largest ultimate shareholders to exercise control at a low cost (see Gugler, 1998). In Austria, ultimate shareholdings are highly concentrated. N. Afgan, M.Z. Mumtaz, R.M. Kunst 525 PSL Quarterly Review The analysis implies that the relationship between marginal 𝑞 and voting rights is an inverted U-curve with a turning point at 69.3% voting rights (see figure 2). The incentive or convergence of interests’ effect dominates the entrenchment up to 69.3% voting rights. However, the entrenchment effect dominates the incentives effect beyond the voting rights’ concentration of 69.3%. Voting rights of the largest ultimate shareholders for 37% of the firms fall under the downward sloping part of the curve. Table 5 – Ownership concentration and investment performance of companies, listed on the Vienna stock exchange Panel E Pooled Ordinary Least Squares Firm Fixed Effects Random Effects Coefficienta (SE) Coefficient (SE) Coefficient (SE) 𝑉𝑅 ⋅ 𝐼𝑡∕ 𝑀𝑡−1 4.35*** (1.459) 4.02** (1.789) 4.35*** (1.459) 𝑉𝑅2⋅ 𝐼𝑡∕ 𝑀𝑡−1 –3.14** (1.229) –2.85** (1.505) –3.14** (1.229) 𝑆 ⋅ 𝐼𝑡∕ 𝑀𝑡−1 0.02** (0.011) 0.03*** (0.012) 0.02*** (0.011) 𝐼𝑡∕ 𝑀𝑡−1 0.70*** (0.382) 0.63 (0.469) 0.71* (0.382) Constant 0.04 (0.010) 0.04*** (0.010) 0.04 (0.010) Effect-covariate correlation –0.05*** 0 (assumed) Observations 385 385 385 Adj. R2 Within R2 0.50 0.56 0.30 Chow F-test statistic for data pooling Degrees of freedom (d.f.) 0.75** (43, 337) Hausman testb 0.67 a Leverage is insignificant. Therefore, it is not reported for saving space. b Null distribution is chi-square (²) with five degrees of freedom. 7. Conclusion This is the first research paper on Austria that analyzes ownership structures of the full population of all non-financial corporations’ listed on the Vienna Stock Exchange. The median of the largest ultimate shareholders’ voting rights concentration is 51.87%, revealing that ownership in Austria is highly concentrated. The Austrian listed companies exhibit a tremendously high concentration of ownership. 526 Ownership concentration and investment performance of Austrian listed companies PSL Quarterly Review Return on investment 3 is 21% lower than the cost of capital, which shows strong evidence of agency costs in the ownership structures of Austrian listed companies. We find strong evidence that the return on investment for firms, which are constituents of pyramidal business groups, is 41% lower than the cost of capital. This implies that the ultimate shareholders of companies that are constituents of a pyramidal business group could divert resources to their private enterprises. State companies in Austria operate in vital industries such as oil and gas exploration and transmission, aerospace, electricity generation, and high technology. Return on investment for the state sample is 28% lower than the cost of capital. This suggests that managers of state companies exercise discretion in investing, which among other factors, leads to suboptimal investment performance. The analytical approach used for determining the optimal level of investment specifies that the marginal rate of return on investment (𝑚𝑟𝑟𝐼) curve is downward sloping that intersects the cost of capital schedule (the cost of capital function is a horizontal line). The investment level that corresponds to the point of intersection is the optimal investment level. Firm fixed effects (FE) and random effects (RE) are estimated on unbalanced panel-data from 2007 to 2020, thereby providing strong evidence of the managerial discretion hypothesis (MDH), which hypothesizes that dominant largest ultimate shareholders or managers invest beyond the optimal level of investment that would maximize firm value. The analyses provide strong evidence of our hypothesis that investment in capital equipment is highly sensitive to firms’ cash flows. Therefore, this study provides conclusive evidence that over-investment leads to returns on investment lower than the cost of capital. The concept of marginal 𝑞 allows us to estimate a causal relationship between ownership concentration and performance, which runs from the former to the latter. Voting rights (𝑉𝑅) of ultimate shareholders positively affect performance, whereas the voting rights squared (𝑉𝑅2) negatively affect performance. This result implies an inverted U-Curve relationship between marginal 𝑞 and voting rights concentration with a turning point at 69.3% (see figure 2). The inverted U-curve drawn in our research conforms to the relationships estimated between ownership and firm performance in previous studies such as the one conducted by Short and Keasey (1999), who measured firm performance of corporations in the UK by return on equity and market to book ratios, and estimated positive, negative, and positive coefficients on directors’ shareholdings, squared directors’ shareholdings, and cubed directors’ shareholdings respectively (see also Stulz, 1988; Kumar, 2008). The intuitive explanation of the upward sloping part of the curve is that the positive convergence of interests or incentive effect dominates the entrenchment effect up to voting rights concentration of 69%. Beyond 69% voting rights concentration, there is strong evidence of the entrenchment hypothesis as the negative entrenchment effect dominates the incentive effect. Voting rights of the largest ultimate shareholders for 37% of the firms analyzed in this research fall under the downward sloping part of the curve. This finding has policy implications for protection of minority shareholders. Although the corporate governance system is strong, largest ultimate shareholders in Austria expropriate firm value to the detriment of minority shareholders. This evidence on minority shareholders’ expropriation has far reaching implications as the entrenchment of ultimate shareholders implies that minority shareholders suffer from 3 GMY (2004) estimated the 𝑞𝑚𝑠 for various countries including Austria. There are a few differences to point out between this study and ours: they capped 𝑀𝑡 and 𝐼𝑡 at the 1st and 99th percentile for each country sample in a global study, while we did not use capped data in our analysis. They do not estimate the effect of ownership concentration on investment performance in their study. Our study estimates the qm for the entire population of Austrian non-financial companies as well as the impact of ownership concentration on performance, from which we draw an inverted U-curve. N. Afgan, M.Z. Mumtaz, R.M. Kunst 527 PSL Quarterly Review expropriation by largest ultimate shareholders. The evidence on expropriation of minority shareholders not only has repercussions for efficient corporate governance in Austrian listed companies but also slows down the growth of Austria’s financial markets. Appendix Definitions: One-share–one vote principle: Each common ordinary share carries one vote. Dispersed Shareholdings: Percentage of shares owned by individual shareholders in a publiclylisted company. Tobin’s 𝑞: The ratio of the market value of total assets of the company and book value. Company size (𝑆): Natural logarithm of total assets. Leverage (𝐿): Total debt divided by total assets. Marginal 𝑞 is a function of largest ultimate shareholders’ voting rights (𝑉𝑅), voting rights squared (𝑉𝑅2), company size (𝑆) and leverage (𝑙𝑒𝑣) as the following equation: 𝑞𝑚= 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 + 𝛾1𝑉𝑅 + 𝛾2𝑉𝑅2+ 𝛾3𝑆 + 𝛾4𝑙𝑒𝑣 Figure A1 – The relationship between voting rights of ultimate shareholders and marginal q 0 0,5 1 1,5 2 2,5 010 20 30 40 50 60 70 80 90 100 Marginal q Voting Rights 528 Ownership concentration and investment performance of Austrian listed companies PSL Quarterly Review References Afgan N., Gugler K. and Kunst R.M. (2017), “Corporate governance and returns on investments of Pakistani listed companies”, Advances in Economics and Business, 58 (1), pp. 190-199. 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