Why Pilotskolan Outperforms the Market

In the Swedish business environment

Authors: Erik Adling Tufvesson, William Blomström, Hans Brunk, Alexander Manieri

Supervisor: Hans Knutsson

Summary

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Table of Contents (example of layout, headings, and order)
BACKGROUND AND PROBLEMATIZATION 3
PILOTSKOLAN 3
PROBLEMATIZATION 4
CHAPTER SUMMARY 4

THEORETICAL FRAME OF REFERENCE 5

RESEARCH REVIEW 5
CHAPTER SUMMARY 5

METHODOLOGICAL CONSIDERATIONS 6
METHOD 6
DATA COLLECTION 8
CHAPTER SUMMARY 9

EMPIRICAL OBSERVATIONS, DATA - PRESENT FINDINGS 10

RELATIVE MARKET PERFORMANCE 10
CHAPTER SUMMARY 10

ANALYSIS 11
CHAPTER SUMMARY 11

CONCLUSION 12
DISCUSSION 12
FURTHER RESEARCH SUGGESTIONS 12
THESIS AND FINDINGS RESTATEMENT 12

REFERENCES 13

APPENDIX 14

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1 Background and Problematization

1.1 Pilotskolan
A commonly discussed issue in corporate finance, arising from the work of Berle and Means
(1932), is the divergence of interests between managers and shareholders in publicly traded
corporations. This conflict of interests exists since managers of a corporation are typically not
its owners, giving rise to principal-agent problems (Jensen and Meckling 1976). For example,
a majority of CEOs from large U.S firm´s own very few stocks in their firms (Jensen and
Murphy 1990). Thus, counteracting this problem remains a question of corporate governance.

One corporate governance mechanism aimed at reducing principal-agent issues is

Pilotskolan​. In firms who apply this concept, the CEO voluntarily invests a significant part of
their personal wealth in the stock of the company. This has been argued to incentivise high
CEO performance by directly correlating CEO compensation with stock price development,
as well as reducing principal-agent problems by aligning CEO and stockholder interests (von
Lilienfeld-Toal & Ruenzi, 2014). Von Lilienfeld-Toal and Ruenzi (2014) examined the
relationship between CEO ownership and stock market performance, concluding that firms
with high CEO ownership outperforms the market with 4% to 10% annually. This effect was
most significant in corporations with “weak external governance, weak product market
competition, and large managerial discretion” (von Lilienfeld-Toal & Ruenzi, 2014).

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1.2 Problematization
As introduced in section 1.1, the concept of Pilotskolan has already been assessed from a
broad point of view. Lilienfeld-Toal and Ruenzi (2014) concluded that f​irms characterized by
high managerial ownership deliver large positive abnormal returns​ and suggest that
Pilotskolan CEOs run their firms more efficiently, assessing differences in performance
metrics between high- and low ownership firms. However, the study does not examine which
underlying performance metrics are most significant in driving this stock market
outperformance.
Consequently, the focus of this report is to build upon the work of Lilienfeld-Toal and
Ruenzi by examining the relationship between management performance and stock market
return in Pilotskolan firms. Specifically, this relationship is calculated as the statistical
correlation between select financial ratios and a measurement of relative stock market
performance. Due to the finite scope of this paper, the analysis is limited to a cherry-picked
sample of firms from the Swedish market, during the time period between 2013 and 2018.
Additionally, only the performance metrics deemed most relevant are assessed.
The main contribution of this report is to serve as a indication of which ratios
consistently generate an increase in perceived value of Pilotskolan firms. Ideally, this report
can aid the reader in generating a deeper understanding of which the most significant benefits
from Pilotskolan are. Perhaps an exploration of Pilotskolan and its connection to investor
perception could aid the reader in analysing the efficiency of different corporate governance
structures.

1.3 Chapter summary

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2 Theoretical Frame of Reference

2.1 Research Review

2.1.1 CEO Ownership, Stock Market Performance, and Managerial Discretion

The relationship between “owner-CEO” and stock performance was first examined by Ulf
von Lilienfeld and Stefan Ruenzi.

Here is gonna follow a summary of Ulf´s study more in depth, going through the following
areas:

● Purpose
● Method
● Result
● Conclusions

We will further explore their independent (dependent) variable in firm performance.

2.2 Chapter summary

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3 Methodological Considerations

3.1 Method
There were several significant methodological aspects to consider before the companies to
base this study on could be picked. Firstly, qualifying for Pilotskolan was defined in the same
way as by von Lilienfeld-Toal and Ruenzi—the CEO owning 10% or more than outstanding
shares. This was done to solidify the connection between the studies and support
comparability between them. Secondly, this study was limited to companies belonging to the
Swedish OMX stock market. The limitation to a single country market was done to satisfy the
relatively limited scope of the paper. The Swedish market was specifically chosen due to high
transparency and availability of information.

Further, we had to consider the risk of industry-specific fluctuations distorting the

results. In order to counteract this, we attempted to create a sample of companies practicing
Pilotskolan that resembles the market structure of the Nasdaq Stockholm. However, the exact
composition of industries on the Nasdaq Stockholm by market capitalisation could not be
found. As a proxy of the market structure, the number of firms in each specific sector
according to the Global Industry Classification Standard, and as used by the OMX
(SOURCE), was chosen. Based on this information, the five biggest industries on Nasdaq
Stockholm were chosen, as well as a single firm practicing Pilotskolan from each sector. The
industries are: industrial, finance and property, health care, information technology, and
consumer discretionary (constituting 79% of the OMX exchange). If more than one firm was
found, we opted for the biggest one, calculated by market capitalisation. This was done to
reduce the effects of small firm valuation increasing faster than large firms.

After constructing the selective sample of the five largest market cap firms practicing
Pilotskolan from the five biggest industries, a time period of 2014 - 2018 was chosen. This
was done since the outcome and effects of managerial decisions are reflected in the stock
price several time periods after its decision and due to the availability of information.

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 In order to measure the outperformance of Pilotskolan compared to the market, the
ratio between a firm's stock return and the return of the SIXPRX index, from the first and last
trading day in a given year was measured. This index was selected as it is a market wide index
including all corporations on the Stockholm OMX and reinvestment of dividends.

To quantify the areas of superior management which contributes to the

outperformance of Pilotskolan, a set of performance metrics were selected in the categories of
productive efficiency, operating performance, and investment activities. EBITDA was chosen
for the category of productive efficiency due to its closeness to operating income and
difficulty of manipulation. Return on Assets was chosen for the category of operating
performance due to its satisfactory representation of how efficiently management utilizes total
assets to generate revenue. Capital Expenditures was chosen for the category of investment
activities due to its adequate representation of a firm’s long-term growth. The chosen
categories and metrics are similar to that used by Lilienfeld-Toal and Ruenzi, as this study is
an extension of previous research with a focus on the correlation between the stated metrics
and stock performance.

Within each year, stated performance metrics were chosen as independent variables
and stock performance relative to index performance were chosen as dependent variables.
Correlating dependencies were then calculated between the metrics and the relative stock
market performance; Ratio analysis was chosen due to its mathematical ease of calculation.

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3.2 Data Collection
3.2.1 Holdings, Stock Prices, and Index Performance

stick to simple straight forward design, make it simple and thorough.

selective convenience sampling. but within some certain predefined limits. why some are
excluded.

Data for the companies with the highest ownership, measured through the percentage of
capital was obtained through Holding Modular Finance (Table 1.). Thereafter stock price data
for the period was gathered through Yahoo finance for each company at the end of the year in
each period, and lastly performance data on the indicators mentioned above were collected
through Börsdata.se as displayed in Table 2.

3.2.2 Secondary: Supplementary case-studies, corporate charter

-Empirical observations+results, ett avsnitt följt av sektionen nedan:

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-Analysis med comments

3.3 Chapter summary

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4 Empirical observations, Data - Present Findings

4.1 Relative Market Performance

Here are the correlations we have found so far.

4.2 Chapter summary

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5 Analysis

5.1 Performance Difference

5.2 Possible Reasons

5.3 Chapter summary

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6 Conclusion

6.1 Discussion

6.2 Further Research Suggestions

6.3 Thesis and Findings Restatement

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References
Jensen, M. C. & Meckling. W. H. (1976). Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure. ​Journal of Financial Economics​, October, 1976, 3 (4): pp.
305-360. Available through: LUSEM Library website ​http://www.lusem.lu.se/library

Fama, E. & Jensen, M. C. (1983). Separation of Ownership and Control, ​Journal of Law and
Economics,​ 26 (2) Corporations and Private Property: A Conference Sponsored by the Hoover
Institution (Jun., 1983): pp. 301-325 Available through: LUSEM Library website
http://www.lusem.lu.se/library​ [Accessed 1 February 2019]

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Appendix

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