Ownership concentration and firm risk: The moderating role of mid-sized blockholders

This study analyzes the relationship between mid-sized blockholders and firm risk. We show that ownership structure matters for firm risk beyond the first largest blockholder. Firms with multiple blockholders take more risk than firms with just one blockholder, even when controlling for the stake of the largest blockholder. Consistent with the diversification argument, we find that firm risk increases by 22% when the number of blockholders increases from one to two. Our results are robust to controlling for blockholder type and firm characteristics. We carry out various robustness checks to tackle endogeneity issues. More generally, we provide evidence that firms’ decisions are affected by mid-sized blockholders and not merely the largest blockholder. This is in line with theoretical predictions.     

Blockholder ownership: Effects on firm value in market and control based governance systems

In this study, Granger tests are used to examine the relationship between blockholder ownership and the values of the largest companies in the European Union and the US. Previous studies on US data have found that blockholder ownership has no systematic effect on performance. We propose that these results may not apply to Continental Europe, where ownership concentration is typically higher, the level of investor protection is lower, and influential blockholders may have objectives other than shareholder value. In accordance with previous research, we find no significant association between blockholder ownership and prior or subsequent firm value in either the US or the UK. Nonetheless, in Continental Europe we find a negative association between blockholder ownership and firm value or accounting returns in the next period. Further analysis reveals that this association is significant only for companies with high initial levels of blockholder ownership (> 10%). We interpret this finding as evidence of conflicts of interest between blockholders and minority investors. The percentage of blockholder ownership in Continental Europe may be too high from a minority shareholder value viewpoint.     

Bank power,block ownership,boards and financial distress likelihood: An investigation of Spanish listed firms

We investigate the effects of bank power, block ownership and board independence on the likelihood of financial distress. Using a matched sample design, we find that firms in which banks have power are more likely than their counterparts to enter financial distress. However, the bank power effects are moderated by block ownership and board independence. Specifically, on the one hand, financial distress due to bank power is lower for firms with greater ownership by pressure resistant blockholders and such blockholders appear to be the largest blockholder in the firm. The bank power effects are also lower in firms with greater outside directors and this appears to be primarily driven by proprietary directors than independent directors. On the other, we document evidence suggesting that the bank power effects are magnified for firms in which the board chair is a proprietary director aligned to non-financial blockholders or CEO/Chair, suggesting that banks might partly influence decisions via board chairs. Overall, the findings are consistent with bank power actions being detrimental to the firm, but the extent to which such actions harm the firm depends on the monitoring intentions of blockholders and/or board of directors. These findings have important implications for policymakers.     

Tacit vigilance in an emerging economy: An institution-based perspective of passive blockholder monitoring

We argue that the relative effectiveness of active and passive blockholder monitoring is driven by the institutional context of the Korean financial market, characterized by the dominance of chaebols and the pressure sensitivity of institutional blockholders. We believe that the extensive business ties between chaebols and blockholders effectively increase the cost of shareholder activism in Korea, making passive monitoring a more applicable governance mechanism for blockholders. We test whether passive monitoring affects a firm’s earnings quality, represented by earnings persistence, value relevance, and timeliness. Furthermore, we decompose institutional shareholding by portfolio turnover and nationality and then determine the monitoring channel that influences earnings quality. We find that passive monitoring by domestic blockholders is most effective in improving earnings quality in Korea. In addition, our findings highlight that the difference between the institutional context of developed economies and that of Korea results in different outcomes related to blockholder monitoring.     

Market Valuation and Equity Ownership Structure: The Case of Agency Conflict Regimes

This paper provides further evidence on the link between the firm's performance and the distribution of the common shares between insiders, blockholders and institutions. We endogenize the functional form of the market valuecommon equity structure relationship by using a switching regression methodology. This allows us to observe four distinct ownership structure types that constitute different agency conflict regimes. We provide evidence that supports the notion that investors recognize the existence of such regimes and assess market values differently depending on the type of agency regime the firm operates in. We find that firms with low insider stakes and low blockholder stakes and firms with high insider stakes and high blockholder stakes have the highest agency costs of free cash flow. We also find that the effect of the ownership variables on market values differs across regimes and that there are differences in the monitoring effectiveness of institutional holders and blockholders.     

Blockholder dispersion and firm value

Multiple blockholder structures are a widespread phenomenon in the U.S. The theoretical literature, however, provides conflicting predictions on whether a single large blockholder or a set of dispersed smaller blockholders is better for firm value. Using U.S. data, we find a negative correlation between Tobin's Q and blockholder dispersion. The findings are robust to a wide variety of model specifications and controls and differ from results for other geographic regions such as Europe and Asia.     

Watch Your Basket ‐ to Determine CEO Compensation

CEOs (chief executive officers) are paid more if they outperform other firms in their blockholders’ portfolios. For every percentage point by which their own firm's return exceeds the return of the largest blockholder's basket of investments in a year, their compensation increases by over $9,800. Once we benchmark to this portfolio, industry returns and own firm returns are of little importance. When the firm is a larger portion of the blockholder's portfolio and when the blockholder is experienced, the reward for outperforming the blockholder's portfolio is greater. Our results are robust to alternate industry classifications and definitions of blockholders.     

Negotiated Block Trades and Corporate Control

We identify negotiated trades of large-percentage blocks of stock as corporate control transactions. When a block trades and the firm is not fully acquired, cumulative abnormal returns average 5.6%, and 33% of the chief executives are replaced within a year. Stock-price increases are larger when control passes to the new blockholder, when management does not resist the blockholder's effort to influence corporate policy, and when the block purchaser eventually fully acquires the firm. These findings suggest that the specific skills and expertise of blockholders, and not just the concentration of ownership, are important determinants of firm value.     

From Social to Private Ownership: Multiple Blockholders in Slovenian Unlisted Firms

This paper studies the ownership structures of unlisted privatized firms in Slovenia. On the basis of official ownership records for all nonfinancial firms over a six-year period (1999-2004), we explore the factors responsible for the concentration of ownership and for the dissolution of the multiple blockholder structures that these firms were assigned at privatization. We observe significant path dependence: patterns of ownership and control are in part determined by the persistence of the initial privatization owners (state funds, privatization investment funds, employees, and managers) as firm blockholders. We also find that ownership concentrates less in larger, riskier, and better-performing firms. Multiple blockholders remain present in the firms in which the two largest owners are of the same type, which presumably makes it easier for them to control in coalition.     

监督还是合谋:多个大股东与公司内部控制质量

中国上市公司大股东持股比例相对较高,大股东之间可能存在合谋掏空或监督制衡的关系,为此,以2008~2016年A股上市公司为样本,探究多个大股东的股权结构对公司内部控制质量的影响。研究发现：相对于只有单一大股东的公司而言,具有多个大股东的公司内部控制质量更高;大股东数量越多、非控股大股东持股比例越高、大股东之间股权偏离度越低,公司内部控制质量越高;外国投资者和国有法人大股东能够显著提升公司内部控制质量;多个大股东的治理效应主要体现在非国有企业中,公司所处地区的法律及市场环境越好,多个大股东监督效应对公司内部控制质量的提升作用越明显。     

Blockholder exit threats in the presence of private benefits of control

Exit theory predicts a governance role for outside blockholders’ exit threats, but this role could be ineffective if managers’ potential private benefits exceed their loss in stock-price declines caused by the blockholders’ exits. We test this prediction using the Split-Share Structure Reform (SSSR) in China, which provided a large exogenous and permanent shock to the cost for outside blockholders to exit. We find that firms whose outside blockholders experience an increase in exit threats improve performance more than those whose outside blockholders experience no increase. The governance effect of exit threats also is ineffective in the group of firms with the highest concern for private benefits of control. Finally, a battery of theory-motivated tests shows that the documented effects are unlikely explained by outside blockholder intervention or some well-known intended effects of SSSR.     

Information transfers among co-owned firms

We study how lenders in blockheld firms exploit the information on the other holdings of equity blockholders to learn their attitude toward creditors. In the presence of the conflict of interest between lenders and equityholders, information on how blockholders behave in the other firms they control provides the lenders with key information about potential blockholder behavior. We test this hypothesis using data on US public firms over the 2001–2008 period. We show that the financial conditions of these co-owned firms affect how lenders value other firms in which the owner has a major stake. Bad news on credit quality in co-owned firms raise the firm's credit risk. Our identification is based on the instrumental variables estimation where we instrument the changes in credit risk of co-owned firms by the natural disaster events in the counties of co-owned firm headquarters.     

Exit as Governance: An Empirical Analysis

Recent theory posits a new governance channel available to blockholders: threat of exit. Threat of exit, as opposed to actual exit, is difficult to measure directly. However, a crucial property is that it is weaker when stock liquidity is lower and vice versa. We use natural experiments of financial crises and decimalization as exogenous shocks to stock liquidity. Firms with larger blockholdings experience greater declines (increases) in firm value during the crises (decimalization), particularly if the manager's wealth is sensitive to the stock price and thus to exit threats. Additional tests suggest exit threats are distinct from blockholder intervention.     

Large investors’ portfolio composition and firms value

We analyze new Swedish data on the portfolio holdings of large blockholders and find that firm value increases with the weight of a stock in a large blockholder's portfolio. In our sample, this weight may be greater than 50%. We are the first to show that this value premium is correlated with portfolio weights for any large blockholders, not just institutions. We find some evidence that indicates that “stock importance” (high portfolio weight) can mitigate the negative effects of a dual-class structure on firm value. Further, it does not seem that a large blockholder's tenure as a CEO or as a board chairman affects this value premium. We conduct a variety of tests to rule out endogeneity and reverse causality.     

Managerial Motives and Merger Financing

We examine how managerial motives influence the choice of financing for a sample of 209 completed mergers from 1981–1988. Our evidence indicates that bidding firm management is more likely to finance mergers with cash when target firm ownership concentration is high, preventing the creation of an outside blockholder. This suggests bidding firm managers prefer to keep ownership structure widely diffused to reduce external monitoring. We also find that bidding firm management is more likely to finance mergers with stock when the variance of bidding firm's stock return is high. This suggests managers of risky firms prefer leverage‐reducing transactions to reduce their personal risk.     

On the relation between ownership structure and capital structure

The agency relationship between managers and shareholders has the potential to influence decision-making in the firm which in turn potentially impacts on firm characteristics such as value and leverage. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by examining a further link between ownership structure and capital structure. Using an agency framework, it is argued that the distribution of equity ownership among corporate managers and external blockholders may have a significant relation with leverage. The empirical results provide support for a positive relation between external blockholders and leverage, and non-linear relation between the level of managerial share ownership and leverage. The results also suggest that the relation between external block ownership and leverage varies across the level of managerial share ownership. These results are consistent with active monitoring by blockholders, and the effects of convergence-of-interests and management entrenchment.     

Ownership structure and earnings informativeness: Evidence from Korea

This paper examines the relationship between corporate ownership structure in Korea and the informativeness of earnings. Korean ownership structure is characterized by the dominance of one primary owner who also participates in firm management. Existing literature offers two alternative perspectives on the behavior of such owner-manager firms, convergence of interests, and management entrenchment hypotheses. We tested the alternative views to see how they are reflected in earnings informativeness. The results show that earnings are more informative as holdings of the owner increase, supporting the convergence of interest explanation for the owner-manager structure. Second, we examine the role of institutional investors and blockholders. On the one hand, institutions/blockholders have incentives to actively monitor management. However, on the other hand, institutions/blockholders may not render effective monitoring because they lack expertise, suffer from freerider problems, or strategically ally with management. These opposing views predict conflicting signs on the relation between the earnings informativeness and holdings of institutions/blockholders. We find that earnings informativeness increases with the holdings of institutions and blockholders. This supports the active monitoring role of institutions/blockholders. Finally, we test the relationship between earnings informativeness for chaebol (Korean business group)-affiliated companies vs. that for nonchaebol-affiliated companies, and find no significant relationship between the owner-largest shareholder's holdings and earnings informativeness. This provides evidence that for chaebol companies, the negative effect of management entrenchment/expropriation of minority shareholders offsets the positive effects. This phenomenon is stronger for chaebol-affiliated companies than for nonchaebol affiliates.     

Large blocks of stock: Prevalence,size, and measurement

Large blocks of stock play an important role in many studies of corporate governance and finance. Despite this important role, there is no standardized data set for these blocks, and the best available data source, Compact Disclosure, has many mistakes and biases. In this paper, we document these mistakes and show how to fix them. The mistakes and biases tend to increase with the level of reported blockholdings: in firms where Compact Disclosure reports that aggregate blockholdings are greater than 50%, these aggregate holdings are incorrect more than half the time and average holdings for these incorrect firms are overstated by almost 30 percentage points. For researchers using uncorrected blockholder data as a dependent variable, these errors will increase the standard error of coefficient estimates but do not appear to cause bias. However, we find that if blockholders are used as an independent variable, economically significant errors-in-variables biases can occur. We demonstrate these biases using a representative analysis of the relationship between firm value and outside blockholders. An online appendix to our paper provides a “clean” data set for our sample firms and time period. For researchers who need to work outside of this sample, we also test the efficacy of alternative (cheaper) fixes to this data problem, and find that truncating or winsorizing the sample can reduce about half of the bias in our representative application.     

Effect of Governance Characteristics on the State of the Firm after an Initial Public Offering

I examine firm characteristics available to investors at a firm's initial public offering date to determine whether they predict the firm's survival, acquisition, or failure. Firms survive more often than they are acquired when they are venture‐backed, the chief executive officer is the original founder, and an outside blockholder is present. The presence of an outside director does not increase the probability of survival. Firms that are more likely to survive than fail include large firms and those with longer board tenure.     

Individual Large Shareholders,Earnings Management,and Capital‐Market Consequences

Using a large hand‐collected sample of all blockholders (ownership ≥ 5%) of S&P 1500 firms for the years 2002–2009, we first document significant individual blockholder effects on earnings management (accrual‐based earnings management, real earnings management, and restatements). This association is driven primarily by these large shareholders influencing rather than selecting firms’ financial reporting practices. Second, the market's reaction to earnings announcements suggests that investors recognize the heterogeneity in blockholders’ influence on earnings management. The results highlight the highly individualized effects of blockholders and a mechanism through which shareholders impact reported earnings.