Institutional Blockholders Research Articles

Institutional Block-Holdings of UK Firms: Do Corporate Governance Mechanisms Matter?

Using a sample of UK firms we find that institutional block-holding is negatively associated with directors’ ownership and is positively associated with board composition, suggesting that institutional block-holders regard directors’ ownership and board composition as substitute and complementary control mechanisms, respectively. We also show that UK institutional block-holders prefer smaller firms and firms with a shorter listing history. The presence of institutional block-holders is associated with smaller boards and lower trading liquidity. Finally, our results indicate that the investment preference of UK institutional block-holders varies with the level of their shareholding.

Governance Mechanisms and Bond Prices

We investigate the effects of shareholder governance mechanisms on bondholders and document two new findings. First, the impact of shareholder control (proxied by large institutional blockholders) on credit risk depends on takeover vulnerability. Shareholder control is associated with higher (lower) yields if the firm is exposed to (protected from) takeovers. In the presence of shareholder control, the difference in bond yields due to differences in takeover vulnerability can be as high as 66 basis points. Second, event risk covenants reduce the credit risk associated with strong shareholder governance. Therefore, without bond covenants, shareholder governance, and bondholder interests diverge. , Oxford University Press.

The empirical relationship between ownership characteristics and audit fees

The present study examines the empirical relationship between ownership characteristics and audit fees. The basic premise is that the level of ownership sophistication and the extent to which ownership is large and substantial impact the effectiveness of stockholder monitoring on corporate affairs including the financial reporting process. Furthermore, high managerial ownership firms may experience a decline in agency problems in financial reporting due to a decrease in managerial propensity to misreport financial results. By employing a cross-sectional least squares regression analysis for a sample of 358 New York Stock Exchange-listed firms audited by the Big Five auditors, we find evidence of a significantly positive relationship between diffused institutional stock ownership (i.e., having less than 5% individual shareholding) and audit fees, and a significantly negative relationship between institutional blockholder ownership (i.e., having 5% or more individual shareholding) and audit fees. Finally, we document that managerial stock ownership is negatively associated with audit fees. We do not, however, find evidence of any relationship between noninstitutional blockholder ownership (with at least 5% individual stock ownership) and audit fees. The study's main results hold in various specification tests including when the effects of board-related and audit committee variables are factored in the analysis. Based on the observed relationship between the ownership variables and audit fees, we suggest that the ownership characteristics of a firm as a part of its governance mechanism constitute an important determinant of audit fees.

On the Association between Changes in Corporate Ownership and Changes in Auditor Quality in a Transitional Economy

This study uses agency theory to test whether the demand for quality-differentiated audits by listed Chinese companies is systematically associated with changes in ownership structure, which is characterized by the dominance of government and institutional owners in a transitional economy. Our empirical test results are supportive of agency theory. Specifically, we find that a decrease of government shares and a corresponding increase of institutional shares lead to a general increase in the demand for higher-quality audits in China's stock market. However, the influence of individual shareholders on a firm's auditor-choice decisions appears insignificant. Our results suggest that in the absence of institutional features typically found in freemarket economies that provide incentives for managers to supply credible accounting information via quality audits, the introduction of large institutional blockholders can be a good alternative for a transitional economy.

Institutional investors as suppliers of equity-linked capital: Evidence from privately placed convertible debt

Using a sample of firms that privately placed convertible debt with a few institutional buyers during the period 1980 to 1998, we find significantly negative stock and operating performance subsequent to the placements. Yet, our examination of the activities between the placing firm and buyers shows that most institutional buyers remain passive investors after convertible debt placements. Our findings support the “windows of opportunity” hypothesis which suggests that firms issue equity or equity-linked securities when their equity is overpriced. Our findings are not consistent with traditional arguments that private financing arrangements with a limited number of institutional investors allow a firm to avoid the information disparity problems that attend capital-raising endeavors by undervalued or correctly priced firms. Nor are our findings consistent with institutional blockholders formed in a private placement performing a quality certification of the firm or aligning the interest of corporate managers more closely with those of shareholders.

Payout Policy, Agency Conflicts, and Corporate Governance

This paper examines the role of corporate governance for payout policy design from the perspective of pre-commitment. We test the effect of external and internal corporate governance on the design of payout policy and use of pre-commitment, level and structure of cash distributions, and firm dividend and repurchase behavior. We argue that firms use pre-commitment to dividend payments to mitigate the agency conflict due to poor governance. We argue that there is an important distinction between dividends and repurchases from the perspective of pre-commitment. Managers that deviate from the chosen dividend policy incur a cost due to a strong negative market response, which reinforces the pre-commitment role of dividends. On the other hand, the market treats share repurchases as more flexible, irregular payouts made at the manager's discretion, which makes repurchases less effective at mitigating the agency conflict. Therefore, a standalone repurchase policy is not sufficient to mitigate the governance failure, introducing the need for dividend pre-commitment as part of payout policy. Empirically, we find that weak governance is associated with a greater emphasis on dividend pre-commitment in total payout composition. Firms with weak governance are also significantly less likely to use standalone repurchase policies as opposed to a dividends - only or a mixed dividends - repurchases payout policy. Costly dividend pre-commitment presents few benefits to well-governed managers. Instead, they either store excess cash in the firm or distribute it through repurchases. We find that the type of monitoring mechanism is relevant for predicting discretionary payouts. Given the generally strong investor protection level in the US, poorly monitored managers are not immune from firing and they will follow a costly dividend policy. Consistent with the proposed explanation, we find that firms with weak corporate governance on average pay higher dividends. The relation between dividends and governance is stronger for firms with high free cash flow. Managers faced with a high takeover threat (external monitoring) are more likely to repurchase and tend to repurchase more on average. On the other hand, strong internal governance (board, institutional blockholder) allows more accurate following of managerial actions and is associated with fewer cash distributions of any kind, including repurchases.

How Preussag became TUI: Kissing too Many Toads Can Make You a Toad

In the period 1997-2004, Preussag, a diversified German conglomerate of old economy businesses, changed itself into TUI, a company focused almost entirely on tourism and logistics. This paper analyzes how this strategy was executed and how it contributed to Preussag’s underperformance of the stock market. We collect 417 announcements of acquisitions, financial disclosures and other news and disentangle the impact of different parts of the company’s strategy. We find that only the divestitures created value, that the strategy to invest in tourism destroyed value, and that the acquisition premiums Preussag paid were mostly unjustified. Bad luck like the events of September 11, 2001 cannot account for the poor performance of the stock. Poor management resulted from poor governance, combining a state-owned bank as the largest shareholder, board interlocks, and insufficient managerial incentives. The case shows how divestiture programs increase the liquid resources available to management beyond free operating cash flows and casts doubt on the positive governance role of institutional blockholders.

Institutional Stock Sales and Takeovers: The Disciplinary Role of Voting with Your Feet

Can institutional stock sales influence firm governance? Theory suggests that informed selling is likely to depress prices and disperse shareholding. Combined, both effects can influence firm governance by facilitating takeovers. I formalize this hypothesis and test its predictions using data on firms that undertake large acquisitions. Using acquisitions to identify firms with potential agency problems, I relate trading by the largest institutional block holder in the post acquisition period to subsequent firm performance and changes in firm governance. The main findings are: (i) Trading by the largest block holder predicts post acquisition stock performance; (ii) controlling for performance, block holder selling increases takeover probability by over 35%; (iii) small firms with more liquid stock are likely to become targets and (iv) there is evidence that the block holder is aware of the takeover possibility before the market. The findings are robust to alternate specifications, alternate samples, and provide a rationale for the observed preference of management and board of directors to retain institutional shareholders.

Dual-Class Shares and Audit Pricing: Evidence from the Canadian Markets

This study investigates whether i) audit fees vary with the discrepancy, or wedge, between cash flows rights and control rights arising from the presence of dual class shares structures, and whether ii) directors' independence and institutional block holders presence moderate this association. Relying on a dual framework for audit pricing, we posit that dual class shares affect audit fees through their effect on the supply and demand for assurance services (Wang 2006). On the supply side, external auditors conduct wider (narrower) scope audits in dual (single) class firms depending on whether dual class shares increase (reduce) auditors' litigation risk. Independent directors and institutional block holders are likely to induce more intense monitoring, thus potentially leading auditors to reassess downward auditors' litigation risk. Such reassessment could lead to a reduction in audit procedures, audit costs, and audit fees. Regarding the demand for audit services, block holders in dual class firms are likely to demand narrower (wider) scope audits in dual (single) class firms in order to reduce the likelihood of detecting material misstatements in financial statements (to enhance contracting terms with external parties wary about agency costs arising from dual class shares; Wang 2006). Independent directors and institutional block holders are likely to demand wider scope audits in order to protect shareholders' interests, to safeguard their reputation, and to reduce their exposure to legal liability. Results are primarily consistent with prior findings documented by Fan and Wong (2005). Audit fees are positively associated with the wedge between cash flow rights and control rights. However, the association between audit fees and the wedge ratio is not moderated by board independence or institutional investors' presence.

An empirical test of the agency problems and capital structure of South African quoted SMEs

The agency theory suggests that the separation of ownership and control in firms creates conflicts of interest between the firm’s shareholders and managers. This is mainly because managers have the opportunity to use the resources of the firm in ways that benefit themselves personally to the detriment of shareholders’ wealth maximisation. This study examines the relationship between agency factors and the capital structure decisions of Small and Medium Enterprises quoted on the Johannesburg Stock Exchange. The results indicate that firms with one major institutional blockholder are able to monitor the opportunistic behaviour of management more effectively than those with more than one institutional blockholders. Effective monitoring could result in more debt being used by management to increase shareholder value. Also firms with high growth potentials tend to exhibit high debt ratio than those with low growth opportunities. With the exception of the number of institutional blockholders and growth opportunities, the associations between the other factors and capital structure were not significant.

Blockholders, Debt Agency Costs and Legal Protection

We investigate how investor protection influences the blockholder-bondholder conflict. We focus on family blockholders, the typical blockholders with high control motivations and the most common type of concentrated ownership, because blockholder-bondholders agency conflicts are clearest in this case. On one hand, family blockholders can mitigate debt costs through their undiversified investments, inter-generation presence, and firm survival concerns. On the other hand, they can exacerbate debt costs because of their unique power position to extract private benefits, leading to higher bankruptcy risk. The ultimate impact depends on how family blockholders are disciplined, specifically by the investor protection laws. Using international bond issues for 1,072 international firms from 23 countries we find that the presence of a family blockholder increases debt costs but the ultimate impact depends on investor protection: family firms in low investor protection countries suffer from higher debt costs compared to non-family firms, while family firms in high investor protection countries benefit from lower debt costs. Family's presence in management further increases debt costs but we find no effect from superior voting rights. We find no impact from institutional blockholdings and there is no evidence that they discipline family blockholders. The results show the importance of investor protection for debt agency conflicts.

Corporate Governance, Monitoring and Litigation as Substitutes to Solve Agency Problem

A Securities Class Action lawsuit is initiated by a large class of shareholders against managers whom they suspect of wrongdoing. This paper proposes that Securities Class Action litigation is an ex post substitute for effective ex ante governance and monitoring. To elaborate this idea, I outline a model in which shareholders see a noisy signal of possible managerial fraud. Since the signal is imperfectly informative, and with costly litigation, shareholders' decision of whether to sue or not is based on the signal as well as the governance and monitoring mechanisms in place in the company. If the signal comes from a strong governed, vigilantly monitored company, shareholders are more likely to attribute it to noise. However if it comes from a company with poor controls in place, then the managers are more likely to have committed fraud and the shareholders sue with a higher probability. I test this idea using various measures of governance and monitoring, and find that firms with high total and abnormal compensation are more likely to be sued. I also find that firms with large institutional blockholders are less likely to be sued, suggesting that blockholders play a monitoring role. However my results find no evidence that outsider-dominated boards or small boards provide effective ex ante governance as a substitute to ex post litigation.

The Congruence of Shareholder and Bondholder Governance

We investigate the effects of shareholder governance mechanisms on bondholders and document two new findings. First, the impact of shareholder control (proxied by large institutional blockholders) on credit risk depends on takeover vulnerability. Shareholder control is associated with higher (lower) yields if the firm is exposed to (protected from)takeovers. In the presence of shareholder control, the difference in bond yields due to differences in takeover vulnerability can be as high as 66 basis points. Second, event risk covenants reduce the credit risk associated with strong shareholder governance. Therefore, without bond covenants, shareholder governance and bondholder interests diverge.

Value Creation in UK High Technology Acquisitions

The fifth merger wave in the USA and the parallel fourth merger wave in the UK that occurred in the 1990s was characterised by a large number of acquisitions of firms operating in high technology areas, such as the telecommunications, computers, the Internet, biotechnology, communications etc. These mergers accompanied and, in fact, were triggered by stunningly high market valuations of high technology firms around the world. Value creation logic of these mergers rests on real options, i.e., new growth opportunities with a large scope for valuation errors and potential value destruction. High tech acquisitions are also driven by managerial risk incentives. While the traditional agency model assumes managerial risk aversion and underinvestment in high tech opportunities, the behavioural agency model allows for risk seeking by managers leading possibly to overinvestment. Corporate governance mechanisms can correct both under- and over-investment, thereby ensuring value enhancing high tech acquisitions. In this paper, we estimate long term wealth gains to acquiring firm shareholders following acquisitions of high technology targets. High tech acquisitions of the 1990s greatly underperform industry peers and companies with similar size and book-to-market ratio, thereby destroying shareholder value. However, acquisitions by high tech firms of other high tech firms create value, although ostensibly they multiply risk. Interestingly, we find a negative relationship between management shareholdings and post-acquisition performance of high tech acquisitions. High managerial ownership seems to reduce managers' risk aversion and encourage overinvestment in value diminishing high tech acquisitions. Monitoring mechanisms, such as institutional blockholders, board structures, and board subcommittees, have no moderating effect on managers' overinvestment.

Characteristics of Institutional Investors and Discretionary Accruals

This paper examines the differential effects of institutional non-blockholders (NONB) and active institutional blockholders (ACTB) on earnings management behavior, as measured by discretional accruals. We propose that NONB stimulates and ACTB mitigates earnings management. We believe that institutional investors do not always work as monitors as suggested by some previous literature. Hence, we propose that institutional non-blockholders are more interested in short-run performance than are institutional blockholders and that this interest creates pressure on management to deliver high earnings. Moreover, we believe that active institutional blockholders exercise their monitoring power more than passive institutional blockholders. Accordingly, we propose that institutional blockholders who are willing to challenge management are active monitors and will reduce the likelihood of earnings management. We also propose that the hypothesized influence of NONB and ACTB on earnings management behavior is affected by earnings pressure (i.e. the gap between target earnings and pre-managed earnings). In particular, we believe that the stimulating effect of NONB on earnings management may not manifest when the stimulating effect of earnings pressures is already strong and the mitigating effect of ACTB may manifest only when the stimulating effect of earnings pressure is there. We group our sample into three earnings pressure conditions: pressure to increase earnings, neutral pressure and pressure to decrease earnings. Consistent with our expectations, we find that NONB stimulates earnings management, but only when earnings pressure is not strong and that ACTB mitigates earnings management, but only when there is pressure to increase earnings. Our study's contributions to the literature are twofold: 1) we show that the characteristics of institutional investors should be considered when examining the relationship between institutional investors and earnings management; 2) we show that the direction and level of earnings pressure should be considered when evaluating the relationship between institutional investors and earnings management.

Board composition, ownership structure and hostile takeovers: some UK evidence

This paper examines the relationship between internal and external control mechanisms in a sample of hostile takeover targets and a control group of non-target firms in the UK for the period 1989–93. The paper investigates whether there are significant differences in board composition, executive ownership and external shareholder control between the two groups. We find that hostile targets are more likely to have different individuals in the roles of chairman and CEO but employ non-executives with fewer additional directorships than non-targets. Executive share ownership is significantly lower in targets, suggesting that hostile bids are more likely to be pursued when target managers possess insufficient equity either to defeat the bid or make the bid too expensive for bidders. We find some evidence that institutional and unaffiliated blockholders in smaller targets help managers defeat unwanted bids.

Market Valuation and Equity Ownership Structure: The Case of Agency Conflict Regimes

This paper provides further evidence on the link between the firm's performance and the distribution of the common shares between insiders, blockholders and institutions. We endogenize the functional form of the market valuecommon equity structure relationship by using a switching regression methodology. This allows us to observe four distinct ownership structure types that constitute different agency conflict regimes. We provide evidence that supports the notion that investors recognize the existence of such regimes and assess market values differently depending on the type of agency regime the firm operates in. We find that firms with low insider stakes and low blockholder stakes and firms with high insider stakes and high blockholder stakes have the highest agency costs of free cash flow. We also find that the effect of the ownership variables on market values differs across regimes and that there are differences in the monitoring effectiveness of institutional holders and blockholders.

The Method of Payment in Corporate Acquisitions, Investment Opportunities, and Management Ownership

This paper provides evidence on the motives underlying the method of payment in corporate acquisitions. The findings support the notion that the higher a firm's growth opportunities, the more likely it is to use stock to finance an acquisition. In addition, the likelihood of stock financing increases with higher pre-acquisition market and acquiring firm stock returns and decreases with cash availability, institutional blockholdings, and in tender offers. Contrary to established theory, however, acquiring firms with higher growth opportunities experience announcement period abnormal stock returns that are significantly negative when stock financing is used regardless of management ownership stakes. Additionally, cash-financed acquisitions are met with significantly negative abnormal returns for acquiring firms with low ownership stakes regardless of the firm's growth opportunities.

Do concentrated shareholdings mitigate the agency problem of “free cash flow”? some evidence

It is often argued that corporate managers tend to waste “free cash flow”. While the standard Berle-Means approach to corporate agency problems suggests that this behavior should be restricted to firms with atomistic shareholders, it is argued here that the effect of concentrated share ownership on the decision to disgorge “free cash flow” is ambiguous because concentrated ownership can blunt the disciplinary effect of a hostile takeover threat. The decision to pay out free cash flow in a sample of large U.S. corporations is found to be unrelated to the size of managerial, family or institutional blockholdings. This suggests that large shareholders are of no use in resolving the free cash flow problem, or that the importance of free cash flow as a source of agency problems has been greatly exaggerated.

Negotiated Block Trades and Corporate Control

We identify negotiated trades of large-percentage blocks of stock as corporate control transactions. When a block trades and the firm is not fully acquired, cumulative abnormal returns average 5.6%, and 33% of the chief executives are replaced within a year. Stock-price increases are larger when control passes to the new blockholder, when management does not resist the blockholder's effort to influence corporate policy, and when the block purchaser eventually fully acquires the firm. These findings suggest that the specific skills and expertise of blockholders, and not just the concentration of ownership, are important determinants of firm value. WE EXAMINE 106 NEGOTIATED trades of at least 5% of the common stock of New York Stock Exchange (NYSE)- and American Stock Exchange (AMEX)listed corporations. Our primary objective is to assess the impact of these transactions on the firms whose shares are traded. We also investigate the importance of active block investor's specific managerial expertise and incentives for firm value. The emerging literature on concentrated ownership focuses on how the level of ownership affects a blockholder's incentives to undertake a variety of corporate decisions. Although it has been recognized that a blockholder's identity also can be important, less attention has been paid to this issue. Several recent, studies, however, provide evidence that blockholders' incentives and expertise are not homogeneous. For example, Holderness and Sheehan (1985) find that the stock market reacts more favorably to initial block accumulations by six controversial investors, who are often portrayed in the press as raiders, than to initial accumulations by a random sample of investors. Morck, Shleifer, and Vishny (1988) find that firm value tends to be lower when the firm is run by a member of the founder's family than when it is run by an officer unrelated to the founder. Brickley, Lease, and Smith (1988) document that institutional blockholders are less willing to vote against management on antitakeover amendments when they are likely to have business dealings with the firm. When a block trades, the concentration of ownership typically does not change, but the blockholder's identity does