Multiple Large Shareholders and Monitoring Effectiveness

Abstract

We advance corporate governance research by examining the role of a firm’s multiple large shareholders on its monitoring effectiveness. We focus on the potential free-riding problem among the large shareholders and argue that free-riding reduces monitoring effectiveness, as reflected in the weakened CEO turnover-performance sensitivity. Longitudinal analyses based on 705 non-financial firms in Taiwan from 1997 to 2011 show that CEO turnover is negatively associated with firm financial performance. However, the negative relationship becomes weaker when large shareholders are more likely to free-ride on each other, such as when large shareholders are more numerous, more contestable, and share greater heterogeneity. The findings provide conceptual and practical implications for corporate governance research and practice.