Pension Reform, Ownership Structure, and Corporate Governance: Evidence from a Natural Experiment

Sweden offers a unique natural experiment to analyze the effects of institutionalized saving on the ownership structure, corporate governance, and firm performance. The Swedish pension reform increased the stock market participation of pension funds, causing a significant reshuffling in the ownership of pension funds. We show that the effects of institutional investment on firm performance depend on the industry structure of pension funds. Firm valuation improves if public pension funds and large independent private pension funds increase their shareholdings. Additionally, controlling shareholders appear reluctant to relinquish control and the control premium increases if public pension funds acquire shares. {JEL G3, G23) A large literature in corporate finance analyzes the effects of ownership on firm performance. Thus far, this literature has not been successful in establishing whether institutional ownership enhances firm value. Partly, this is because ownership and performance are jointly determined and an increase in institutional ownership may be positively correlated with performance merely because investors select firms that they expect to perform better. It is thus impossible to draw conclusions about causal relations simply by saturating firm performance regressions with a large number of firm characteristics in addition