The Impact of Minority Shareholder Protection and Atomization of Shareholder Base on the Nonoperating Activities of Firms

Abstract

In the presence of strong minority shareholder protection mechanisms, shareholders may become placid and even inattentive with regards to their firms’ nonoperating activities in the hope that those mechanisms serve to assure agents’ incentive compatibility. Relying on a cross-country panel database, the paper evidences that a stronger minority shareholder protection at the country level is associated with larger firm-level long-term nonoperating investments, higher share of nonoperating investment incomes in the firms’ bottom line, and relatively larger acquisitions. At the company level, the implementation of stronger minority shareholder protection mechanisms, like internal policies favoring shareholder engagement and equality of voting rights, is documented to result in higher reliance on nonoperating incomes, larger acquisitions, higher cash reserves and lower dividend payouts. At the same time, the atomization of shareholder base appears to reduce the effectiveness of nonoperating activities as the firms with a larger shareholder base tend to hold more long-term investments while concomitantly recording lower investment incomes. In contrast, higher shareholder diversification is shown to be associated with lower cash holdings and higher dividend payouts. Overall, while being attentive to cash management and dividend policies, minority shareholders seem to be excessively forbearing with regards to the use of the bulk of nonoperating assets.