Regulations and Change in Ownership Structure

Subject: Management
Pages: 20
Words: 5546
Reading time:
23 min
Study level: College

Summary

The performance of any organization is largely influenced by the ownership structure of the organization, as well as any regulations within the organization’s areas of operations (Alves & Mendes 2004). Barontini and Bozzi (2009) observed that following the increased global competition, achieving maximum performance in an organization is the goal of every company nowadays. For this reason, Bhagat and Bolton (2010) asserted that there is a need for organizations to understand the determinants of financial performance in any organization. The subjects of changes in ownership structure and the effect of various regulations have been studied extensively (Blair & Hite 2005; Alves & Mendes 2004; Chen, Wei, Qiao & He 2013). Nonetheless, few organizations have focused on the effect of regulations and changes in ownership structure on the financial performance of companies (Blajer-Gołębiewska 2010). This can be attributed to the fact that there is always a lack of alignment between the shareholders’ interests and those of the managers in any organization. Such cases are very common nowadays and they lead to a reduction in the financial performance and value of the affected organization (Boccia 2013). Since 1990, Chen, Démurger and Fournier (2005) observed that the concept of ownership structure has been common in various countries including the post-communist nations.

Analyzing the issue of corporate regulations and changes in ownership structures is challenging given that the current business environment is undergoing a rapid transformation following extensive privatization processes alongside cases of increased negative social phenomena (Cuomo, Zattoni & Valentini 2012). This paper focuses on developing a theoretical model that can be used for a better understanding of the effect of regulations and changes in ownership structures in the general performance of an organization (Wei 2007). Usually, the performance of any given organization is largely influenced by the company directors since they have a lot of impact on the ownership structure of the concerned company (Deakin 2010). The rationale to study this concept was informed by the fact that there is limited research in this area given that most of the available studies in corporate governance only cover the general relationship between organizational results and the various practices of corporate governance such as shareholder activism or even the board structure. As such, Ding (2010) pointed out that numerous studies do not focus on particular organizational context and diversity of environments, and how such aspects affect the efficacy of various regulations practices.

Background of the study

Regulations and ownership structures differ significantly with respect to various countries (Gatti 2009). Various studies have been conducted that document the challenges of corporate governance (Kohlbacher & Gruenwald 2011; Kumar & Zattoni 2015). By separating the control and ownership of private companies, a principal-agent problem arises and can have a lot of impacts necessitating the use of sub-optimal capital (Liu & Magnan 2011). However, in a case where the owner is highly dispersed, it is unlikely that the shareholders can have effective monitoring of the management of the concerned corporation. Usually, the process of regulating an organization is expensive, which implies that often shareholders’ marginal performance benefits are outweighed by the marginal costs of regulations (Lakshmi 2010). Considering the case of 1932 in the USA where most of the organizations changed their ownership structures to public companies, it is evident that different ownership structures have various benefits associated with each individual structure (Lee 2015). For example, public companies enjoy the benefits of scope and scale with respect to the specific domestic market.

In the case of Europe, a lot of changes in ownership structures have occurred in the past twenty years (Lakshmi 2010). For example, there have been large-scale programs focusing on the privatization of corporations with the aim of significantly reducing the control of the government by moving most enterprises to the private sector. The European Union experiences salient issues as far as effectiveness in corporate governance and ownership structures are concerned (Liu & Magnan 2011). This is attributed to the fact that a high proportion of the Gross Domestic Product in the EU is associated with companies that are publicly listed and such companies have control from an insignificant number of shareholders (Lee 2015). The role of regulations and corporate governance is to solve cases of agency problems whereby companies change their ownership structures at will for the purpose of benefiting from certain aspects of a given ownership structure.

Wang (2009) asserted that there are various effects of ownership structures on the governance functions that may not be as exposed as those of legal protection. Theoretically, there are ambiguous effects on any deviations from corporations of small shareholders. The main focus here is on the savings in terms of cost made when there is commendable support for the weak legal protections but the shareholders get the advantages of employing concentration and identity of ownership structures. According to Weiss and Nikitin (2010), just like legal protections, ownership structures have the ability to help in the provision of corporate governance functions. Accordingly, Haque (2010) noted that changing the regulations in any region can have adverse effects on the general performance of any given company. Additionally, Lejenas and Rodhe

(2007) observed that changes in the ownership structure of a given company have similar effects on the operations of the concerned company. For example, Haque (2010) relates this to a case whereby the owner of any given company is restricted on the choice of the appropriate structure for the company. Such a case limits the company in terms of operations, as well as denies the company the benefits that it would have enjoyed operating in a certain ownership structure. There are numerous studies that have been conducted and which show a lot of concerns with respect to the move to separate the control and ownership structures in organizations, a move that resulted in a reduced level of organizational performance.

Valadares and Leal (2008) observed that changing the ownership structures and control as in the case above has a lot of impacts since the shareholders lose control over the management of public corporations. As a result of such a lack of control by the shareholders, organizations are likely to fail since the management gets the chance to execute their own interests without putting into consideration the demands and needs of the shareholders. Evidently, changes in regulations and ownership structure have a lot of impact on the performance of organizations. This paper will analyze these concepts deeply in the literature review to gain the necessary insights and understanding of the role of regulations and changes in the ownership structures in the operations of any organization.

Research objectives

The primary objective of this study is to analyze the aspects of regulations and the changes in ownership structures with the aim to examine the significant impacts that such aspects have on the general performance of any given organization. Nonetheless, the study has specific objectives as listed below:

  1. To provide critical analysis of the various ownership structures.
  2. To critically analyze the concept of corporate governance and its effects on organizational performance.
  3. To find out whether or not specific changes in ownership structures affect the performance of organizations.

Research questions

Research questions are considered effective guidelines in any given study, as they provided the path through which a researcher examines the specific phenomenon under study. In this case, the study has several questions as listed below which stem from the study’s research objectives.

  1. What are some of the various ownership structures available?
  2. Is there a significant link between organizational performance and the concept of corporate regulations?
  3. Can the performance of any organization be affected by any changes in ownership structure?

Significance of the study

Studies on corporate governance and the changes in ownership structures are limited. As such, there is limited knowledge on the effect that these concepts have on the general operations and performance of organizations. For this reason, there is a need for more studies on regulations and ownership structures to provide the necessary information on these concepts. The study will provide critical analysis of the various ownership structures, critically analyze the concept of corporate governance and its effects on organizational performance, as well as gain insights on whether or not specific changes in ownership structures affect the performance of given organizations. Evidently, the results and findings from this study will have a significant impact in that they will act as an addition to the existing school of knowledge on corporate governance and the effect of changes in ownership structures.

Chapter Summary

This chapter has provided background information of the study by focusing on the concept of organizational regulations and changes in ownership structures. Secondly, the chapter highlighted the research objectives and research questions to be used in analyzing the subject of regulations and changes in ownership structures. Additionally, the introduction chapter has presented the significance of carrying out this study by pointing out the existing gap in the literature as far as studies on regulations and changes in ownership structures are concerned. An in-depth analysis of the phenomenon under investigation is provided in the literature review chapter.

Literature overview

The concept of changes in ownership structure and the associated regulations have elicited a lot of interest over the past years (Liu 2008). Magdaléna (2008) attributed such interests to the difference in approaches to the various aspects of ownership structures and diverse understanding of the concept among different individuals. Blair and Hite (2005) noted that the subjects of changes in ownership structure and the effect of various regulations on the performance of any organization have been studied extensively. In spite of this, Alves and Mendes (2004) pointed out that there has been limited focus on the effect that regulations and changes in ownership structure have on the financial performance of companies. While the changes in ownership structures have a significant impact on the performance of any company, studies on this concept are few, with the existing ones focusing on specific aspects of ownership structures while neglecting others (Mallin 2012). For this reason, there is the need for comprehensive research on the concepts of regulations and ownership structures and the effect that such aspects have on the performance of any given company. Therefore, this study provides an in-depth analysis of the subject of corporate governance and the view of ownership structures with respect to their effect on organizational performance. Thus, the literature review will cover the subject of ownership structures and regulations, effects of regulations and changes in ownership structures, institutions and policies of corporate governance systems, national legal protections, internal, governance policies in relation to ownership structure as well as the concept of ownership identity and concentration.

Ownership structures

The ownership structure is an example of the different components of corporate governance (Blair & Hite 2005; Mallin 2012). The ownership structure of any given country depends on the characteristics of the corporate governance of the specific country. For example, the level of stick markets’ development largely influences the ownership structure of corporations in the concerned country (Chen, Démurger & Fournier 2005). Additionally, the regulations, as well as the state of intervention have adverse effects on the ownership structure in any given country.

There are various shareholder structures for different countries in the world (Chidambaran, Palia & Zheng 2011). However, the ownership of such structures is more dispersed in specific firms in the UK and the US in comparison with Europe which has prevalent controlled ownership (Cuomo, Zattoni &Valentini 2012). Several studies indicated that 5232 corporations that carry on public trade in some countries in Western Europe are not all publicly held. Only 36.93% were held widely (Mallin 2012; Nakhla 2015). Additionally, studies carried out among several countries indicated that rich economies are mostly involved in the ownership of large companies in the world (Nathan 2011). In most cases, the ownership of such companies is applied by the use of pyramidal groups that are mostly controlled by some subsidiaries and holding companies. The shareholders in charge of controlling such companies play an essential and active role in the management and participate in making decisions at the Board of Directors’ meetings (Blair & Hite 2005; Nathan 2011). In the United States, Nietsch (2005) noted that large shareholders take the control of most companies and participate in making the most significant decisions of such companies. However, such large companies may be fewer and rare to find compared to small and medium-sized companies. As a result, they may draw less attention in the debates on corporate governance (Cuomo, Zattoni &Valentini 2012; Pindado 2011). The ownership between both small and large companies has different structures that cause different results on corporate governance.

On the other hand, there are dominant shareholders who play an active role in the management of the companies, can exercise their powers to discipline the management and can stop the operations of the company following any deviations to their standards of operation (Nietsch 2005). However, if the ownership is concentrated, it can cause some conditions that make it conducive to the emergence of new challenges (Fracassi & Tate 2012). This is because they can have both the incentive and the power to control the interest of both minority and controlling shareholders (Pindado 2011). In addition, several studies have given details on the differences in ownership structures for different countries that are used in different companies (Poli 2015). Some of the countries with such differences include Europe, the US and the UK. There have been increased concerns regarding the way corporate governance gives rights and responsibilities to individuals in the possession of firm stakes, as well as the way they are structured. However, diversity plays a significant role in ownership structures of different countries since a concept may be understood differently in different countries, leading to differences in definition across the world.

In most studies that give comparisons among different structures, there are two dichotomous models that are in contrast (Rakowska, Valdes-Conca & de Juana-Espinosa 2015). These models are mainly used in corporate governance and include the Continental European and the Anglo-American models (Wen 2011). For instance, the characteristics given to US and UK’s models are those of dispersed ownership. In this model, the main mechanisms of corporate governance are contractual incentives, legal regulation, and corporate control for markets (Sliwka 2009; Apostolov 2010). In some countries such as Japan and continental Europe, families and banks are among the largest shareholders and thus have the biggest capacity to control and make decisions on how their companies will operate (Tan & Yu 2011). This operation is however in the context of few rules and thus governs the disclosure of market orientation, greater debt supplies, and weaker incentives of management. Agency view is the most commonly used literature for finance and accounting that is reflected as the key role of corporate governance. Different people concerned with the success of organizations have different interests (Snopko 2012). For instance, shareholders have a primary interest to minimize risks for the purpose of getting maximum returns (Teimoury, Fesharaki & Bazyar 2011). On the other hand, those in the management team prefer getting higher profits or building their empire within the organizations so that they can earn higher salaries and fast promotion opportunities (Tan & Yu 2011). In addition, the managers may decide to put less effort and may make labor costs more expensive or retain the standards of products above the minimum levels required for healthy competition in the industry.

Since there is a notable difference between the controllers and the owners of companies, they all need several mechanisms to use so as to align their agents’ interests and theirs (Teimoury, Fesharaki & Bazyar 2011). The cost of agents may arise from the problems experienced by shareholders in efforts to monitor their management. For instance, shareholders face challenges such as inadequate information to use in making decisions and the fact that they do not have much discretion to make and implement qualified decisions (Valadares & Leal 2008). However, there are several mechanisms that can be utilized to help in reducing unnecessary costs and ensure the profitability of companies. For instance, corporate bonds are used to assist in aligning the interest of shareholders with those of the management. However, the major focus of such boards from the perspective of agents is to monitor the decisions and actions of the management (Welch 2008). Boards can be defined as the mechanisms that govern the internal affairs of a firm and help in shaping the governance of such firms once they have the access to other responsibilities in the triangle of corporate governance that includes the shareholders and the managers.

Several studies have indicated that one of the most essential mechanisms is how the board structure is composed (Ishikawa, Sugita & Zhao 2009). For instance, there are some boards with non-executive directors that are mostly given the responsibility to observe and monitor closely the actions of other directors. They are further given the responsibility to ensure that the executive directors implement their actions to the agreed-upon policies and that there are no deviations to such agreements. The policies set and implemented must also be in line with the interest of shareholders. For the reforms of corporate governance to be witnessed, boards of directors also play essential roles. In effect, there has been an emergence of the board as the center of blame for the misdeeds of corporates and as the body that has the powers to improve corporate governance. It has thus been given the largest responsibility to reduce the excess power within firms with the main focus on pushing the non-executive directors to improve the accountability of the executive directors.

The perceptions of different people about independent directors are very different. For instance, most people believe that they can help in improving corporate governance (Liu & Magnan 2011). From several studies, such expectations that non-executives play an interesting role in improving corporate governance indicated different results about the independence of boards of directors and the performance of an organization. However, several studies indicated that an organization that uses the services of independent directors is likely to succeed and become more competitive in the market than others. Other studies further indicated that such firms can as well obtain worse results from independent directors (Nakhla 2015). In addition, it is advisable for organizations to examine the skills possessed by individuals before giving them the responsibility to act as the directors of their firms. Studies postulated that the board of directors selected ought to have a variety of skills so as to support specialists, be business experts and become insiders in the organizations (Welch 2008). For instance, such people need to have special skills in public relations or law as well as be influential in the community such as joining community organizations.

There is the resource dependence perspective that mainly gives a substitute to the use of the agency perspective. According to this perspective, corporate governance can only be attained when the appointment of the board of directors is done by experts who aim at helping organizations to cope well with the uncertainties in their environment of operation (Haque 2010). Most of the prescriptions given on policies about corporate governance have great reliance on best practices that are universal notions of most people. Such practices need to be adopted by local firms so that they can easily be transferred to large firms through growth and expansion. However, the most essential question to be answered in this paper is if the companies, despite their pattern of ownership, can use the rule that fits all organizations to use more non-executive directors and separate the chairman and CEO of organizations. Several studies further stated that in the national institutions, there are differences in aspects such as the structures of ownership, how to enforce the regulations of corporate governance as well as cultural diversities (Lejenas & Rodhe 2007). On the other hand, there are various constraints that there is need for the mechanisms of corporate governance to be diverse and for organizations to better understand the role that the board of directors should play in them so that it can be improved (Welch 2008). With such, the accountability of such individuals will be improved, leading to profitability in organizations. In addition, every organization has to invest its resources in improving its own structure so that there can be similarities in interest pursued by organizations (Magdaléna 2008). These interests need to be similar for the top management, and shareholders who are mostly on the board of directors.

Effect of regulations and changes in ownership structures

The performance of any given company can adversely be affected by changes in regulations as well as the ownership structure of the given company (Lejenas & Rodhe 2007). In a case whereby the owner of any given company is restricted as far as choosing the appropriate structure for the company is concerned, the performance of such a company can be adversely affected (Haque 2010). In recent years, researchers and scholars have shown a lot of concerns following the separation of control and ownership in organizations, a move that resulted in a reduced level of organizational performance (Valadares & Leal 2008). The implication of such a change in ownership and control is that the shareholders lose control over the management of public corporations. Resultantly, the managers of such corporations get the opportunity to carry on the management of the concerned organizations according to their self-interests.

Institutions and Policies of Corporate Governance Systems

The policies of internal governance and the corporate governance institutions affect the promises and expectations of countries (Welch 2008). For instance, the impact on the fulfillment of promises, has an influence on the future returns expected, and as a result, they influence choices and decisions on investments. However, they have several differences among themselves. For instance, Valadares and Leal (2008) asserted that investors assume that institutions are exogenous and affect their decisions regarding particular ventures. However, the most essential areas of concern for countries are the type of institutions to deal with as well as the improvements that can be made in the fulfillment of promises. These aspects are therefore related in some way and influence the investment decisions of both investors and the country.

National Legal Protections

The financiers’ legal protections that are covered by the law are the most famous corporate governance institutions. Wang (2009) observed that investors’ use of any available resources within an organization is influenced by the existing legal protections in the concerned country. However, these aspects are always conflicting. The literature on economics and law offers a prominent view on the requirements that a given organization and investors have to fulfill for them to be legally protected. Valadares and Leal (2008) attribute such a scenario to the fact that contract laws are only applicable to contracts and any other form of judicial matter. For this reason, national legal protection cannot apply in such cases. Wang (2009) noted that such cases can be handled effectively by investors without the intervention of the national legal authorities. Additionally, Weiss and Nikitin (2010) pointed out that such protections are unnecessary since complex investors can expand the protections or contract out.

There is a need for better national protection of investors and organizations. This need emerges from the limits offered by the contracts as well as the understanding that most countries do not only rely on simple solutions given by the legal system (Wang 2009). As a result, governments intervene through the introduction of more legal mechanisms that are aimed at giving procedural specifications and remedies in case there are breakdowns on the most commonly used governance (Welch 2008). However, this approach has a key assumption that there can be improvements in income through artificial constraints experienced (Valadares & Leal 2008). These improvements can be obtained through the use of bargaining power to compete for the corporation’s wealth and the general willingness to invest in firms.

The legal protections have a key role in ensuring that a lot of emphases is given on all the elements of any given organization to ensure that all shareholders have a contribution to the process of making decisions in organizations. Such an approach avoids the challenge associated with cases of authoritarian management. For this reason, such approaches ensure that the management does not influence negatively the operations of the concerned organization. However, they allow for essential interference with the transactions that have low costs, especially at the deterioration of situations (Weiss & Nikitin 2010). In particular, the legal provisions focus on six main rights against the directors that give an indication of the power holder in organizations (Wang 2009). For instance, they have low powers to call for unexpected meetings, the existing shareholders have defensive rights to emerging issues, and they can use cumulative voting. In addition, they can vote by the use of mail, they can be more present than minority shareholders and their shares cannot be blocked before the occurrence of meetings. They further have the right of sourcing information whether two additional provisions are absent or present (Welch 2008; Petit-Konczyk 2010). For instance, the provision of one share and one vote allows all shareholders the opportunity to enjoy diverse rights in an organization such as the right to cast votes in favor of a given decision or proposal. The other provision is on the mandatory dividends and helps in the protection of minority interests.

Most legal protections nowadays have the provision for allocating power according to the interests of all shareholders. They have a temporary concentration on the provision and control of credible threats for the replacement of insiders, whether they are the controlling shareholders or managers (Valadares & Leal 2008). There are cases that require a lot of attention as far as legal protection is concerned such as issues related to lawsuits or even cases whereby a given company faces the threat of takeover. In such complaints, equity shareholders form groups that seek to sidestep the board and to cause the present actions of the management or those with the board approval to stop (Weiss & Nikitin 2010). In takeover cases, a new controlling investor has the power to replace the existing investors. This can be very helpful in solving the currently faced problems in ownership structure and taking more vigorous actions against the willingness of the management (Welch 2008). However, the takeovers are very essential as they assist in efforts to overcome the challenge of public good that occur during the control of management actions that face most small shareholders. The efforts to increase ownership even if for a short period can become more expensive for utilization.

The legal protections further focus on the protection of financiers against anticipated but unnecessary outcomes. Such outcomes may be failure towards the fulfillment of promises in the distribution of returns (Wang 2009). Laws on bankruptcy give specifications for the criteria that should be used in the determination of failed promises as well as the procedure that should be used during the control of reallocation over the distribution and utilization of assets (Welch 2008). This is normally done with a strong focus on temporary control by the judges who ensure the successful transfer of the assets collected by investors to the trustees (Weiss & Nikitin 2010). In cases where the legal protections are robust, organizations enjoy various benefits since such protections are associated with fast actions and a bargaining process that is highly predictable

Internal Governance Policies: Ownership Structure

There are various approaches that are utilized to address corporate governance functions (Weiss & Nikitin 2010). For instance, there can be a clear examination of a firm’s operations as well as the policies that are set by the directors and are already under implementation. Some of the policies to be examined may be those that are related to the production of information, management of any form of incentives and risky situations in the organization, as well as issues associated with solving any competition claims (Shafiqul-Huque 2011). Such cases ensure that a lot of focus is given to the ownership structure available, as well as identifying the extent of owners’ concentration. The ownership structures have various effects on the governance functions that may not be as exposed as those of legal protections (Wang 2009). Theoretically, changes in the corporations of small shareholders lead to uncertain impacts on the given organization. The main focus here is on the cost savings made when there is commendable support for the weak legal protections but the shareholders get the advantages of employing concentration and identity of ownership structures (Weiss & Nikitin 2010). Just like legal protections, it is more likely that ownership structures have the capacity to help in the provision of corporate governance functions.

Promise Fulfillment through Ownership Identity

Where legal protections are not available, investors may not be willing to offer resources to other people in the exchange of promises (Gorga 2013). This is because, in case of violations of the promises, the investors lack clarity on the penalties that should be imposed (Wang 2009). In addition, failure to invest in corporations does not lead to any danger. However, there are linkages between the currently occurring promise violations and penalties in the future. As a result, the individuals that are in charge of the organization’s resources can be propelled by the disadvantages in the future, and hence work toward fulfilling their promises. Some of the people that may be involved in the violations for financier interest are insiders from the firms (Valadares & Leal 2008). As such, they are no longer able to appeal to them for more financing. The reputation of such individuals may become more effective through imposing severe punishments such as fines in case the promises are unfulfilled.

In general, where there are existing networks that help in the provision of information, there is an allowance for coordinated actions (Salleh, Ahmad & Kumar 2009). Individuals can thus get multilateral reputations through their investments by the use of networking. Several studies indicated that commercial revolution can be easily driven by good reputation feedback mechanisms (Haque 2010). Valadares and Leal (2008) further indicated that there are systems of community responsibilities whereby if one member does not fulfill their promises, the burden is felt by all the other members. As a result, individuals identified with such communities are likely to gain better opportunities for investment.

The major issue here is that it is possible for investor controllers to advance in their operations regardless of the fact that they might not have any investments presently, by just relying on their identities. In substitute for such a mutual reputation, there are high demands for information and limited investment scope (Apostolov 2010). On the other hand, without such identity, trade becomes almost impossible; the demand for information becomes low while the investment scope increases (Wang 2009). This may be due to the fact that individual investors do not need to get high volumes of information as they only want to know less about the history of their investment controllers (Welch 2008; Wang 2009).

As a result, they need to have a community affiliation where they can hand over their resources. In addition, the identification with a certain community provides further assistance in claiming for penalties in case their controllers fail to honor their promises. It thus affects the beliefs of investors (Weiss & Nikitin 2010). Though this may not be a threat to individual investors, having an identity with the community may be very helpful (Wang 2009). This is because identity provides governance in cases where legal protections are not available. Identity can further assist in the improvement of results when there are weak legal protections mostly in developing countries (Valadares & Leal 2008). Therefore, it is credible to assert that gaining the identity of a large community helps in the provision of corporate governance functions. On the other hand, in cases of stronger legal protections, the cost of gaining community identity may be too high above the benefits that can be obtained. This is because the legal protections provide a cheap alternative to the same.

Promise Fulfillment through Ownership Concentration

This can be defined as a second deviation that enhances the fulfillment of promises for disperse shareholding (Welch 2008). The ability to reduce the problem of public good that comes as a result of monitoring becomes a motivational factor for concentration. It is asserted that a greater stake of ownership leads to more individual returns from monitoring and control and the resultant ability to obtain more information that will be collected by the owners (Teimoury, Fesharaki & Bazyar 2011; Welch 2008). Several studies stated that evidence from corporate finance suggests that shareholder activism is directly proportional to the ownership concentration (Wang 2009; Weiss & Nikitin 2010). As a result, concentrated owners have large stakes and take top positions in boards, control the management, play an essential role in setting company strategies, have the powers to dismiss the management and can even manage companies.

The argument in this case is that ownership concentration can help in the provision of corporate governance functions (Wang 2009). Mostly, it takes part in countries where legal protections are weak and breeds more benefits than costs. As pointed out by Valadares and Leal (2008), when there is concentrated ownership, there is no need for specialization and separation based on the relative advantage of the management team and investors.

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