Concentration of ownership

McMillan also worries that “NZ public companies tend not to be widely held.” In addition to low capitalisation, he is uneasy that concentration of ownership may be a sign that the broad measures of regulation are missing something about minority protection. However, a closer look at ownership of New Zealand public firms allays some of these concerns.

Control of large publicly traded firms

Updated ownership data is presented on the degree to which New Zealand firms are “widely held”

I present updated data on the degree to which New Zealand firms are widely held. Specifically, the update is based on the same La Porta et al (1999) concentration measures that McMillan refers to. La Porta classifies publicly traded firms in 27 countries (including New Zealand) as either “widely held” or ultimately owned by one of the following: “family”, “state”, “widely held financial institution”, “widely held corporation” or miscellaneous. This process requires tracing ownership, sometimes through a chain of firms across national borders. The updated assessment is made using data as of 23 June 2006, based chiefly on information from Investment Research Group (IRG) and annual reports.

Consider New Zealand’s largest publicly-traded firm (by capitalisation), Telecom.[8] The largest single shareholder, as of June 2006, was Brandes Investment Partners LP, with a 6.7% stake. La Porta calls any firm with no single shareholder larger than 20% “widely held”.[9] So, the Telecom case is simple: it is widely held. In contrast, the largest shareholder of another large firm, the Warehouse Group, is an individual, S.R. Tindall, who had a 27.5% stake, as of June 2006.[10] Accordingly, this firm falls under the “family owned” category according to the La Porta classification.[11]

La Porta analyses a sample of publicly traded firms, as of end-1995, for each country: the twenty largest firms (by capitalisation), excluding “foreign affiliates” (firms at least 50% owned by a single overseas firm).[12]

Source: The 1995 results are from La Porta et al (1999); the 2006 update is based on the author’s calculations.

In the large firm sample, the ownership of New Zealand’s firms was below the OECD average in 1995, but above average in 2006

Table 1 shows La Porta’s 1995 classification of control for the twenty largest publicly traded firms for Australia, the OECD and New Zealand, as well as the update for New Zealand as of 2006. In 1995, New Zealand was below average in the widely held category. However, the updated figures – as of June 2006 – show that the proportion of NZ firms in the “widely held” category has increased from 30% in 1995 to 65% in 2005.

Control of “similar size” publicly traded firms

Another sample compared “similar sized” firms across countries – this is a more appropriate comparison given the fairly small size of New Zealand’s large firms.

In addition, a closer look at the 1995 results reveals a less concentrated picture of New Zealand firms than McMillan suggests. McMillan refers to La Porta’s “large firm” sample, as described above. But one problem – acknowledged by La Porta – is that this compares fairly small New Zealand firms with larger firms in the United States, United Kingdom, Australia and other countries, simply because each of the largest twenty firms in a small country will tend to be smaller than its counterpart in a larger country. To get around this problem, La Porta presents a second sample of firms for each country: the ten firms with capitalisation just above USD500 million, excluding foreign affiliates, banks and utilities (which they say would otherwise dominate the sample). This may be a better comparison for the purpose of evaluating the New Zealand stock market, because it does a better job of comparing similar-sized firms around the world.[13] La Porta calls these “medium firms” although in the case of New Zealand in 1995, these are the seven largest firms on the New Zealand market (ie, there were not even ten firms that fit the criteria in 1995). For this reason, it is perhaps best to refer to this sample comparing “similar size” firms across countries.

Source: The 1995 results are from La Porta et al (1999); the 2006 update is based on the author’s calculations.

In the “similar size” sample New Zealand appears less concentrated than most of the OECD in both 1995 and 2006

In this “similar” sample (see Table 2), according to the 1995 La Porta data, New Zealand has a larger percentage of firms (57%) classified as “widely held” than average for the OECD (26%). The New Zealand figure compares favourably to Australia (30%), Canada (60%), and the United Kingdom (60%). That is, New Zealand appears less concentrated than most of the OECD, even for 1995. Updated New Zealand figures are also presented for 2006.[14] These show that the proportion of firms classified as “widely held” in this “similar” size range has remained fairly constant since 1995.

The La Porta classification system may have some limitations for evaluating the effectiveness of the New Zealand stock market.

More generally, the La Porta classification system may not be appropriate for evaluating the effectiveness of the New Zealand stock market. For example, consider what would happen to the classification of the largest New Zealand firms in Tables 1 and 2 if the government decided to float 10 percent of each state-owned firm that is not currently publicly traded. This would clearly be good for market capitalisation and Dickie (2005b) argues that it would be good for the health of the market. However, according to the La Porta classification, such a move would raise the proportion of largest firms classified as “state” at the expense of the “widely held” category (ie, the market would look more concentrated).