Corporate Finance and Governance in Firms with Limited Liability: Basic Characteristics

We analyze a wide range of corporate finance and governance characteristics in all active Norwegian firms with limited liability over the period 1994-2005. This sample includes about 77,000 nonlisted (private) firms and 135 listed (public) firms per year. Nonlisted firms have barely been addressed in the finance literature, despite our finding that they employ four times more people than listed firms, have about four times higher revenues, hold twice as much assets, and constitute over 99% of the enterprises. Indirect evidence suggests that this is also the typical situation worldwide. The unexplored nature of nonlisted firms makes us address a large set of characteristics, and to focus more on describing overall patterns in the data rather than making elaborate tests of behavioral hypotheses. We find that the size distribution of firms in the economy is close to lognormal, which is consistent with independence between size and growth for the individual firm. Most nonlisted firms are small, but there are still many more large firms in the economy that are nonlisted as opposed to listed. Nonlisted firms have more liquid assets, invest less, but still grow like listed firms of comparable size, possibly because capital constraints cause underinvestment and hence higher marginal returns. Their debt is considerably higher and has shorter duration, which may be due to stronger information asymmetry between borrowers and lenders or to asset-liability matching. Nonlisted firms distribute much more of their earnings once they pay dividends. This may reflect that their owners value dividends more highly due to high transaction costs of selling illiquid stock, and that strong owners of nonlisted firms pay high dividends to reduce expropriation threats to weak owners. Ownership concentration is much higher in nonlisted firms, particularly when persons control them. Concentration decreases with firm size, but is still very high even in large nonlisted firms. Persons hold most of the equity except in listed firms, where indirect ownership through corporations dominates. Ownership control through pyramids is rare, but holdings that are legally critical for control (i.e., 1/3, 1/2, or 2/3) are widespread. The typical board is very small, stable over time, and homogenous in terms of gender and stakeholder mix. Larger boards, which are more often found in large, old, listed firms with low ownership concentration, tend to have younger directors, female directors, and employee directors. The much higher insider holdings in nonlisted firms makes the agency conflict between managers and owners negligible. In contrast, the potential conflict between inside and outside owners is large. Listed firms are in the opposite situation. The operating performance (ROA) is higher when personal ownership is high, the board is small, the CEO is a director, when earnings are paid as dividends, and when the firm is nonlisted. This evidence suggests that personal ownership reduces agency costs more than ownership through intermediaries, that good boards are small boards, and that high dividend payout benefits owners by increasing the liquidity of their wealth and aligning their interests. And, most importantly, these findings show that listing status per se matters not just for corporate finance and governance, but also for the ability to create economic value. An exciting arena for future research is to uncover where this excess performance of nonlisted firms comes from, particularly in a setting where thousands of firms can choose whether to stay private, go public, or to delist.