The impact of dominant ownership: the case of Anglo-American firms

Abstract

Ownership has been identified as a key mechanism in corporate governance. Agency theory suggests that high levels of ownership provide increased incentive for shareholders to monitor firm management which should lead to better firm performance. However, not every shareholder may have the same inclination and ability to act as an effective firm monitor. It is argued that the largest or dominant shareholder of a firm may have differing incentives to monitor their investment in the firm. This study examines the impact of three types of dominant shareholders on firm performance. Using a longitudinal sample of firms in the US and UK, findings show that firm performance is negatively influenced by CEO dominant owners. Furthermore, firms with dominant owners who have no existing business relationships with the firms have better firm performance than firms with dominant owners who have potential conflicts of interest. Thus, findings suggest that while dominant ownership creates the ability to monitor and influence firm management, the type of owner plays a large role in whether a shareholder has the inclination to engage in firm monitoring.