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Governance through Exit and Voice: A Theory of Multiple Blockholders.” unpublished working paper
, 2008
"... Traditional theories argue that governance is strongest under a single large block-holder, as she has strong incentives to undertake value-enhancing interventions (engage in “voice”). However, most firms are held by multiple small blockholders. This paper shows that, while such a structure generates ..."
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Cited by 32 (4 self)
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Traditional theories argue that governance is strongest under a single large block-holder, as she has strong incentives to undertake value-enhancing interventions (engage in “voice”). However, most firms are held by multiple small blockholders. This paper shows that, while such a structure generates free-rider problems that hinder voice, the same co-ordination difficulties strengthen a second governance mechanism: disciplining the manager through trading (engaging in “exit”). Since multiple blockholders cannot co-ordinate to limit their orders and maximize com-bined trading profits, they trade competitively, impounding more information into prices. This strengthens the threat of disciplinary exit, inducing higher managerial effort. The optimal blockholder structure depends on the relative effectiveness of manager and blockholder effort, the complementarities in their outputs, informa-tion asymmetry, liquidity, monitoring costs, and the manager’s contract.
Ownership structure and the cost of corporate borrowing
- Journal of Financial Economics
, 2011
"... This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996–2008 period, we find that the cost of debt financing is significantly higher for ..."
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Cited by 23 (3 self)
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This article identifies an important channel through which excess control rights affect firm value. Using a new, hand-collected data set on corporate ownership and control of 3,468 firms in 22 countries during the 1996–2008 period, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner’s control rights and cash-flow rights and investigate factors that affect this relation. Our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by their excess control rights. These activities increase the monitoring costs and the credit risk faced by
Pension Reform, Ownership Structure, and Corporate Governance: Evidence from Sweden ∗
"... Finance for helpful comments and Ying Lin for excellent research assistance. Giannetti acknowledges financial support from Bankforskningsinstitutet and the Jan Wallander and Tom Hedelius Foundation. Laeven acknowledges financial support from the World Bank. We are also grateful to Sven-Ivan Sundqvis ..."
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Cited by 10 (1 self)
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Finance for helpful comments and Ying Lin for excellent research assistance. Giannetti acknowledges financial support from Bankforskningsinstitutet and the Jan Wallander and Tom Hedelius Foundation. Laeven acknowledges financial support from the World Bank. We are also grateful to Sven-Ivan Sundqvist for providing us with the data on shareholdings. The views presented in this paper are those of the authors and should not be attributed to or reported as reflecting the position of the IMF, or its Executive Directors. Abstract: Conventional wisdom holds that pension reforms by spurring the importance of pension funds may increase stock market development and improve corporate governance. Sweden offers a unique natural experiment to analyze the microeconomic effects of pension reforms on ownership structure, corporate governance and firm valuation. The Swedish pension reform increased the participation of institutional investors in the domestic stock market and caused a significant reshuffling in the ownership of the existing pension funds. The availability of detailed micro data on firm ownership allows us to document the effects of the pension reform on ownership structure and corporate governance of listed companies. We exploit the exogenous timing in the increase in pension funds ’ holdings to address endogeneity concerns. We show that firm valuation increases if government pension funds increase their equity stakes. However, controlling shareholders are reluctant to relinquish
Being a Foreigner among Domestic Banks: Asset or Liability?
, 2009
"... Do foreign banks have an advantage operating abroad? The existing literature has come up with different answers. Studying the performance of foreign banks relative to domestic banks in a large number of countries between 1999 and 2006, we find that the answer importantly depends on a number of facto ..."
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Cited by 9 (0 self)
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Do foreign banks have an advantage operating abroad? The existing literature has come up with different answers. Studying the performance of foreign banks relative to domestic banks in a large number of countries between 1999 and 2006, we find that the answer importantly depends on a number of factors. Specifically, foreign banks tend to perform better when from a high income country and when competition in the host country is limited. They also perform better when they are large and rely more on deposits for funding. Foreign banks improve their performance over time, possibly as they adapt to the local institutional environment. Foreign banks from home countries geographical or cultural close to the host country perform better than distant foreign banks. Institutional familiarity, however, does not help (improve) foreign banks ’ performance. These findings show that it is important to control for heterogeneity among foreign banks when studying their performance and help reconcile some contradictory results found in the literature.
Family ownership and control, the presence of other large shareholders, and firm performance: Further evidence
- Journal of Small business Management
, 2011
"... This article analyzes, using various econometric techniques, how family ownership, family control, and the presence of a second significant shareholder affect firm performance. The authors studied a panel of 118 nonfinancial Spanish companies (711 observations) from 2002 to 2008. Once endogeneity is ..."
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Cited by 9 (0 self)
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This article analyzes, using various econometric techniques, how family ownership, family control, and the presence of a second significant shareholder affect firm performance. The authors studied a panel of 118 nonfinancial Spanish companies (711 observations) from 2002 to 2008. Once endogeneity issues were considered, it was found that family ownership did not influence profitability. What seems to matter is family control. This study also reveals the importance of taking into account unobservable heterogeneity and endogeneity issues when analyzing firm performance and provides an interesting future avenue of research: the role played by other large shareholders in family firms.
Exit as Governance: An Empirical Analysis
, 2011
"... Recent theory posits a new corporate governance channel available to blockholders: the threat of exit. Threats, however, are distinct from actual exits and thus difficult to measure directly. This paper exploits financial crises as natural experiments that exogenously changed stock liquidity and thu ..."
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Cited by 7 (0 self)
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Recent theory posits a new corporate governance channel available to blockholders: the threat of exit. Threats, however, are distinct from actual exits and thus difficult to measure directly. This paper exploits financial crises as natural experiments that exogenously changed stock liquidity and thus the credibility of blockholder exit threats. During these crises, firms with larger blockholder ownership suffered larger declines in firm value, attesting to the governance role of exit threats. Additional tests distinguish this governance role from traditional blockholder monitoring through intervention. We are especially grateful to the editors and the referee. We also thank Anat Admati, Lauren Cohen,
Corporate Block Acquisitions around the World
, 2008
"... University for their invaluable comments and suggestions. All errors are my own. Between 1990 and 2005, 14 percent of the world’s public firms were targets in a minority block acquisition, of which one third are cross-border in nature. These firms are mostly financially constrained with high growth ..."
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Cited by 4 (0 self)
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University for their invaluable comments and suggestions. All errors are my own. Between 1990 and 2005, 14 percent of the world’s public firms were targets in a minority block acquisition, of which one third are cross-border in nature. These firms are mostly financially constrained with high growth opportunities and experience significant increases in their stock prices at the announcement. Financially constrained targets that have joint ventures or alliances with the corporate acquirers experience largest increases in their stock price. In the immediate two years following the acquisition, 27 percent of target firms issue new equity and the increase in the amount of net equity issuances is large. These findings are consistent with the conclusion that equity stake purchases by other corporations are useful in alleviating asymmetric information faced by target firms in raising external capital. There is little evidence that corporate blockowners lower contracting costs in the product market, effectively monitor insiders or capitalize on their overvalued stocks. 2 Between 1990 and 2005, 14 percent of public firms around the world were targets in a minority block acquisition, with the fraction of acquired equity averaging 16 percent. 1 There is also large cross-country variation in corporate block acquisition activities. Thirty-three percent of public
Corporate Control and Multiple Large Shareholders
, 2009
"... † I am grateful to the Indian Statistical Institute, N.Delhi for their hospitality while writing this paper. Corporate Control and Multiple Large Shareholders Many firms have more than one blockholder, but finance theory suggests that one blockholder should be sufficient to bestow all benefits on a ..."
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Cited by 3 (0 self)
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† I am grateful to the Indian Statistical Institute, N.Delhi for their hospitality while writing this paper. Corporate Control and Multiple Large Shareholders Many firms have more than one blockholder, but finance theory suggests that one blockholder should be sufficient to bestow all benefits on a firm that arise from concentrated ownership. This paper identifies a reason why more blockholders may arise endogenously. We consider a setting where multiple shareholders have endogenous conflicts of interest depending on the size of their stake. Such conflicts arise because larger shareholders tend to be less well diversified and would therefore prefer the firm to pursue more conservative investment policies. When the investment policy is determined by a shareholder vote, a single blockholder may be able to choose an investment policy that is far away from the dispersed shareholders ’ preferred policy. Anticipating this outcome reduces the price at which shares trade. A second blockholder (or more) can mitigate the conflict by shifting the voting outcome more towards the dispersed shareholders’ preferred investment policy and this raises the share price. The paper derives conditions under which there are blockholder equilibria.The model shows how different ownership structures affect firm value and the degree of underpricing in an IPO. 2 1
Disproportional ownership structure and pay–performance relationship: evidence from China's listed firms
, 2011
"... This paper examines the impact that ownership structure has on the pay-performance relationship in China’s listed firms. We find that the cash flow rights of the ultimate controlling shareholder have a positive effect on this relationship while a divergence between the control rights and cash flow r ..."
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Cited by 3 (1 self)
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This paper examines the impact that ownership structure has on the pay-performance relationship in China’s listed firms. We find that the cash flow rights of the ultimate controlling shareholder have a positive effect on this relationship while a divergence between the control rights and cash flow rights has a significantly negative effect. By dividing our sample into state owned enterprises (SOE), state assets management bureaus (SAMB), and privately controlled firms, we find that cash flow rights in SOE controlled firms have a significant impact on accounting based pay performance and cash flow rights in privately controlled firms also affect the market performance based relationship, however, CEO pay in SAMB controlled firms bear no relationship with either accounting or market based performance. We therefore argue that CEO pay is inefficient in firms where the state is the controlling shareholder because it is insensitive to market based performance but consistent with the efforts of controlling shareholders to maximize their profits.
Do Family Firms Use Dividend Policy as a Governance Mechanism? Evidence from the
"... Manuscript Type: Empirical Research Question/Issue: This study investigates whether family firms use dividend policy as a corporate governance mechanism to overcome agency problems between the controlling family and minority investors. We further account for deviations between ownership and control ..."
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Cited by 2 (1 self)
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Manuscript Type: Empirical Research Question/Issue: This study investigates whether family firms use dividend policy as a corporate governance mechanism to overcome agency problems between the controlling family and minority investors. We further account for deviations between ownership and control and consider the presence and identity of other large shareholders in family companies. Research Findings/Insights: Based on a sample of firms from nine Eurozone countries and using a panel data method, we find that family firms distribute higher and more stable dividends to alleviate expropriation concerns of minority investors. However, the higher dividend payments are mainly explained by family firms with no separation between the largest owner’s voting and cash flow rights and those with non-family second blockholders. Theoretical/Academic Implications: We contribute to the literature by shedding light on how the family business model affects companies ’ dividend preferences. Our research also highlights the importance of taking into account the identity of large shareholders, especially in a context in which concentrated ownership structures are commonplace. The reported differences in dividend policies between family and non-family firms help to clarify the variant performances of family businesses found in previous studies. Practitioner/Policy Implications: Family firms should regard dividend policy as a governance tool that allows them to attract prospective investors and enlarge their shareholder base. Simultaneously, minority investors can benefit from family firms ’ dividend decisions. Our evidence also suggests that European policy makers should lay the necessary foundations to prevent controlling families from adopting ownership structures that serve their own personal interests.
