Departmental Papers (School of Law)

Document Type

Book Chapter

Date of this Version

January 1995

Start Page


Last Page



This study compares firms in the Hees-Edper Group with a number of other independent firms of similar size and in the same industries over a four-year period from 1988 to 1992, just prior to the first release of news that the Hees-Edper group was in financial trouble. During that period, HeesEdper firms recorded profitability levels comparable to (or below) those of the matched firms. The Hees-Edper firms were also shown to have been much higher risk investments well before the group's financial position began to deteriorate. They were more highly levered, but even after risk levels are adjusted for this, the risk levels of Hees-Edper firms remain much higher.

Our study shows that the extreme incentive-based compensation schemes used by Hees-Edper firms encouraged managers to adopt high-risk strategies, and that the intercorporate co-insurance (allowed by the interlocking ownership structure of the firms) made this possible by increasing the group's apparent debt capacity. Since this higher risk did not improve overall performance, it was arguably at an economically inefficient higher level. The higher leverage of Hees-Edper companies should have produced a sizable tax advantage because of the deductibility of interest at the corporate level. The mediocre performance of the companies thus raises the possibility that abnormally poor performance was masked by tax breaks.


Reprinted from Corporate Decision-Making in Canada, edited by Ronald J. Daniels and Randall Morck (Calgary: University of Calgary Press, 1995), pages 223-240.

Note: At the time of publication, the author Ronald Daniels was affiliated with the University of Toronto. Currently, he is Provost of the University of Pennsylvania.

Included in

Law Commons



Date Posted: 17 July 2008