Corporate Control and Multiple Large Shareholders

Abstract

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 a second blockholder may be useful. 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 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 two, one or no blockholder are the equilibrium outcomes.