Abstract
We study the monitoring behavior of minority shareholders in private companies. We draw on a landmark judgment by Texas Supreme Court in June 2014 that significantly curtailed minority shareholders’ monitoring ability in private firms. The judgment provides a natural experiment to examine how the reduced monitoring ability impacted firm performance and to infer the monitoring behavior of minority shareholders. Using hand-collected data, we document evidence consistent with over monitoring by minority shareholders. Further, we document investments and leverage as potential channels of monitoring. We contribute to existing literature by providing evidence on the monitoring behavior of monitory shareholders in private firms. Importantly, our evidence also highlights the importance of market feedback mechanism; without a continuous feedback loop from the stock markets, minority shareholders seem to act in a manner that (unknowingly) hurts the firms they are invested in.
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