Are hol­dings hid­den trea­sures in the Bel­gian stock mar­ket?

This article provides an analysis on the undervaluation of Belgian Holdings and its determinants. Empirical evidence shows that discounts are strongly and negatively related to investor sentiment, the dividend yield, size of a holding, and the use of leverage. A positive relation can be found between the discount and both the expenses and number of listed subsidiaries of a holding. 

Holding companies (Holdcos) acquired a lot of power and capital throughout history, which made them have a large influence on the Belgian economy. This can be explained by the attractive tax landscape of Belgium, where companies are not obliged to pay taxes on the added value they create. Also, where banks fail to provide capital to starting entrepreneurs, holdings provide a solution. They close the funding gap for start-ups by providing risk capital.

Start-ups are one of the major drivers for economic growth in a country which makes holdings play an important role in the economic activities of a country.

Holdings are not only of use on the macroeconomic level but also play a role at the microeconomic level. Retail investors benefit by investing in holding companies as well. By buying only one share of the holding company, investors are diversified over several countries and sectors. Holding companies can invest in both listed and non-listed companies, which might increase the attractiveness of holdings since they allow retail investors to invest in private equity. This market would not be accessible for retail investors when holdings wouldn’t provide the opportunity to invest in them. Furthermore, the returns of holding companies usually outperform those of the Stoxx-600 index in the long run.

However, as illustrated in Figure 1 holdings have never quoted at a discount as high as over the past 10 years. A discount appears whenever the intrinsic value of a company is higher than the market value of that company. In efficient markets a rational investor would consider this as an investment opportunity. When markets are inefficient it can be the case that these discounts will remain there even in the long run. The presence of discounts in the Belgian holding company sector but also its determinants are researched in my master’s dissertation. Similar research has been performed for Korean and Italian holdings but there is still a lack of empirical evidence to be found on this phenomenon for Belgian holdings.

Data

In Belgium there are 51 companies considered to have a holding activity. In this dissertation only large listed holdings are considered since the transparency requirement makes them suitable candidates to study their respective discount. The time scope used for the master’s dissertation goes from 1995-2022. Since there is a collection of time series data on the one hand and cross-sectional data on the other hand this dataset is well suited to be integrated into a panel dataset. Panel datasets are more informative since they consider both dimensions and have more data points compared to performing only a time-series or only a cross-sectional study and a result will lead to more useful insights. This dissertation covers thus an unbalanced panel dataset using 37.438 observations.

Methodology

This master’s dissertation considers a fixed effect model as the general model to investigate ex-ante expectations. The Holdco discount is included as the dependent variable. The variation in the dependent variable is explained by a set of explanatory variables. From an economic point of view, the choice for a fixed effect model can be motivated by the fact that the selection of data is not representative of the population. The total population would be Belgian Holding companies, but a selection is made within the population. Only large listed Holding companies are chosen. From an econometric point of view, this method takes individual heterogeneity of the holdings into account. This is necessary since every holding has a different strategy and focuses on different core activities and cannot be considered homogenous. Also, the fixed-effect model allows working with an unbalanced panel dataset and controls for time-invariant Holdco-specific attributes. To guarantee the reliability of the results the following robustness tests are performed: exclusion of the data for the first year after IPO, using an alternative estimation method, alternative proxies, subperiod analysis and a cross-sectional analysis.

Results

The following insights can be provided to investors and the management of holding companies based on my master’s dissertation. On the one hand, a Holdco trading at a discount does not guarantee a high-yield investment opportunity. Discounts can persist and fluctuate throughout history as illustrated earlier in Figure 1.

Mostly, investor sentiment and fund-specific characteristics play a crucial role in explaining the fluctuations in the holding company discount. Discounts on Holdcos are reduced in periods during which a bullish investor sentiment is present in the market and vice versa. Therefore, investing in highly discounted Holdcos when sentiment is at its lowest might be beneficial as the performance of holdings will pick up again. On the other hand, some fund-specific characteristics have an impact on the discount. Firstly, increasing the dividend yield and lowering the expenses can attract investors and arbitrageurs. Increasing the dividend yield reduces holding costs for arbitrageurs, making them more incentivized in picking up discounted holding. Cutting expenses of a holding also results in a lower discount since more profits can be distributed as a dividend or capital gain. Secondly, decreasing the number of listed participations and so increasing the private capital share of a portfolio makes investors more attracted to investing in Holding companies. This is because retail investors have limited access to the private market and so replicating the portfolio of these holdings becomes more difficult. Thirdly, when holdings increase the use of debt this can create an interest tax shield, debt discipline, and leveraged returns and so reduce the Holdco discount. Lastly, results show that large holdings are associated with economies of scale and access to capital and so reduce the discount of holdings compared to their stock price.

Conclusion

The main conclusions of this dissertation are that holdings have traded at a discount throughout history and probably will in the future as well. Finding a straightforward answer to why holdings trade at a discount remains impossible for now. However, further research can complement this study in many ways. Firstly, expanding the number of determinants that might explain the fluctuations of the holding company discount. Moreover, the number of sampled holding companies should be enlarged. Lastly, the scope of the research could also be expanded to a European level. This way the phenomenon of the holding company discount can be understood and acted on better.