Large Shareholders and Firm Value: Interaction between Power and Incentive to Expropriate

Abstract

This study examines the relationship between large shareholders and firm value and how this relation varies with the large shareholders’ power and incentive to expropriate a firm’s wealth. We find this relation is U shaped with the turning point at around 45% and 65% for the largest shareholders and total blockholders, respectively. The higher the power (or higher control right) means the more the expropriation or lower firm value. However, in firms with controlling blockholders (beyond 50% control right approximately), blockholders have enough power to manipulate firm’s activities but their incentive to expropriate decreases due to private benefits being lower. This study also finds that firms in high investor protection countries are associated with higher values than those in low investor protection countries for any blockholding level, but the difference in firm value between weak investor protection countries and strong investor protection countries is highest when expropriation by blockholders is largest.