Large Blockholders Research Articles

Corporate ownership and control contestability in emerging markets: The case of Colombia

This study examines the structure of voting control and blockholders’ contestability for a sample of 233 non-financial listed firms in Colombia during 1996–2004. Corporate control is characterized by high ownership concentration and blockholder power, which implies low separation ratios between cash flow rights and voting rights. On average the separation ratios for the largest voting block is 0.95, while that for the fourth largest shareholder is 0.75. Corporate control is privately biased when there is direct monitoring of firm management by controlling owners. Regression results show that a more equal distribution of equity among large blockholders has a positive effect on firm value. Contestability matters most when firm shares are liquid and actively traded on the stock market. This finding is reinforced when the probability that the largest block can form a winning coalition decreases and performance variables, such as market to sales ratio and return on equity, are included in the estimating equations as substitutes for firm value. In addition, our estimations provide evidence that diversion of rents (tunneling) is limited by blockholders’ contestability.

Do investor perceptions of corporate governance initiatives affect firm value: The case of TIAA-CREF

We examine the valuation effect of the announcement of TIAA-CREF's Corporate Governance Policy, an exogenous event fitting McConnell's [McConnell, J. J. (2003). Outside directors. Financial Review, 38, 25–31] description of a “controlled experiment”. This event avoids the negative connotation associated with announcements concerning specific firms. Abnormal returns are positively related to the number of large block holders and the number of institutional owners, indicating that the values of firms with weak governance structures declined or the values of firms with desirable governance structures increased. Also, the percentage of institutional ownership and the number of institutional owners have a low correlation, indicating that they are different dimensions of institutional ownership.

Ownership and Financing Structures of Listed and Large Non‐listed Corporations

In this paper, we use a large firm‐level dataset covering 19 European countries in order to compare the ownership and financing structures and performance of listed (LCs) and large non‐listed companies (NLCs). For the overall sample, we find that the substantial majority of NLCs have either a large or medium blockholder. This contrasts with the ownership structure of LCs, which usually have no large blockholder. Moreover, we present information on typology of large blockholders as well as financial ratios in LCs and NLCs. The results from matched‐pairs analysis, employed in order to directly compare the two categories, suggest that NLCs use relatively less fixed assets and they appear to be more capital intensive than LCs. In terms of performance, NLCs have higher returns on assets and equity than LCs do, but lower margins. Overall, the paper contributes to the understanding of differences between NLCs and LCs.

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.

Minority Blocks and Takeover Premia: Comment

Minority blockholders are a common phenomenon, even in stock markets with a predominantly dispersed ownership, such as the U.S. and U.K. Against that backdrop, the paper purports to explain how the presence of a minority blockholder affects the occurrence of takeover bids. According to Burkart, Gromb, and Panunzi [2006] (henceforth BGP), their paper aims to illustrate why the presence of large blockholders may facilitate takeovers. More precisely, they claim to show that the presence of a minority blockholder can lead to a higher takeover premium than with dispersed ownership. Obviously, the two statements are incompatible. As the authors themselves point out in their paper, the necessity of offering a higher premium lowers the probability of a takeover bid being launched at all. Small shareholders will benefit from the presence of a large minority shareholder, and thus of a higher takeover premium, only if a bid is actually launched. From a lawyer's perspective, what is of particular interest is whether the results of the paper yield any substantive regulatory implications. This is doubtful, however, since the authors do not offer any quantitative assessment of the conflicting benefit effects associated with the presence of a large minority blockholder. Moreover, as the following observations may demonstrate, central features of the BGP model (section 2) appear to be inherently questionable (sections 3 and 4) and are, furthermore, in striking contrast to empirical observations (section 5).

Governance and Cost of Capital: Evidence from the Enron Shock

We view the Enron scandal as an exogenous shock to test whether the quality of corporate governance affects firms' cost of capital. If governance is indeed reflected in the cost of capital, we expect to find increases in the cost of equity and debt capital post Enron for poorly governed firms. We find that the market betas from the one factor model and the cost of equity capital, computed from both the one factor and three factor Fama-French (1993) type models, increase in a statistically and economically significant manner post Enron for poorly governed firms relative to well-governed firms (governance proxied by g score, ownership by largest block holder and by public pension funds). We find modest downgrades in the debt ratings of poorly governed firms post Enron relative to well-governed firms. We conclude that high quality governance does have a favorable impact on firms' cost of capital.

Does ownership structure affect value? A panel data analysis for the Spanish market

This paper analyzes the influence of ownership structure on firm value. We find a non-significant relationship between the ownership of large blockholders and firm value. We also find a positive effect of the degree of control with regard to firm value. Endogenous treatment of these variables then reveals a positive effect for the ownership by major shareholders on firm value, although the opposite relationship is not significant; and a positive effect of the degree of control on Tobin's Q and vice versa. A positive effect is seen when the major shareholders are individuals.

Alternative Internal Controls as Substitutes of the Board of Directors

Empirical literature on corporate governance often assumes independence among different control mechanisms. However, different studies in the Anglo-Saxon context find that control mechanisms are interrelated. The Spanish corporate governance system, unlike the Anglo-Saxon one, is characterised by the dominance of internal controls, mainly the stock ownership concentration and the board of directors. In this internal control context, we specifically analyse the possible substitution of the supervisory potential of the board outsiders by the incentive effects derived from managerial stock ownership and the supervisory role of large shareholders. Our main results show a negative relationship between the proportion of outside directors and managerial and large blockholders’ ownership stake. These findings support the substitution among internal controls and suggest that Spanish firms form an efficient conglomerate of managerial controls, in which deficiencies in a single mechanism can be compensated by the action of an alternative one.

Investment and internal finance: Asymmetric information or managerial discretion?

This paper examines the investment-cash flow sensitivity of publicly listed firms in The Netherlands. Investment-cash flow sensitivities can be attributed to overinvestment resulting from the abuse of managerial discretion, but also to underinvestment due to information problems. The Dutch corporate governance structure presents a number of distinctive features, in particular the limited influence of shareholders, the presence of large blockholders, and the importance of bank ties. We expect that in The Netherlands, the managerial discretion problem is more important than the asymmetric information problem. We use Tobin's Q to discriminate between firms with these problems, where LOW Q firms face the managerial discretion problem and HIGH Q firms the asymmetric information problem. As hypothesized, we find substantially larger investment-cash flow sensitivity for LOW Q firms. Moreover, specifically in the LOW Q sample, we find that firms with higher (bank) debt have lower investment-cash flow sensitivity. This finding shows that leverage, and particularly bank debt, is a key disciplinary mechanism which reduces the managerial discretion problem.

Conflicts of Interest or Aligned Incentives? Blockholder Ownership, Dividends and Firm Value in the US and the EU

This paper examines the relationship between blockholder ownership, dividend policy and firm value in the largest EU and US companies during 1988–1998. Large owners may benefit other shareholders by effectively controlling company managers, but may also differ from minority investors by a preference for retained earnings, from which they derive private benefits of control. This paper analyses these effects in a non-technical way using simple correlation analysis. The level of blockholder ownership in continental Europe is found to be much higher than in the US/UK, whereas firm value is somewhat lower. A negative association is found between blockholder ownership and firm value in continental Europe, which indicates that the level of blockholder ownership is excessive from a minority shareholder viewpoint. Moreover, although blockholder ownership levels in Europe are not generally associated with lower dividends, increases in blockholder ownership are found to be associated with decreasing dividends, and the stock market appears to respond more favourably to increasing dividends in companies with a high level of blockholder ownership. In the US/UK, higher blockholder ownership is generally associated with lower dividends, which are again negatively correlated with firm value. In both the EU and the US, the results therefore point to conflicts of interest between large blockholders and minority investors, but more strongly so in Europe.

Corporate Social Responsibility as a Conflict Between Shareholders

In recent years firms have greatly increased the amount of resources allocated to activities classified as Corporate Social Responsibility (CSR). While an increase in CSR expenditure may be consistent with firm value maximization if it is a response to changes in stakeholders' preferences, we argue that a firm's insiders (managers and large blockholders) may seek to over-invest in CSR for their private benefit to the extent that doing so improves their reputations as good global citizens. We test this hypothesis by investigating the relation between firms' CSR ratings and their ownership and capital structures. Employing a unique data set that categorizes the largest 3,000 U.S. corporations as either socially responsible or socially irresponsible, we find that on average, insiders' ownership and leverage are negatively related to the firm's social rating, while institutional ownership is uncorrelated with it. These results support our hypothesis that insiders induce firms to over-invest in CSR when they bear little of the cost of doing so.

The Impact of Property Characteristics on Economic Performance of Russian Industrial Enterprises

The paper provides new survey evidence on effects of concentrated ownership upon investment and performance in Russian industrial enterprises. Authors trace major changes in their ownership profile, assess pace of post-privatization redistribution of shareholdings and provide evidence on ownership concentration in the Russian industry. The major econometric findings are that the first largest shareholding is negatively associated with the firm’s investment and performance but surprisingly the second largest shareholding is positively associated with them. Moreover, these relationships do not depend on identity of majority shareholders. These results are consistent with the assumption that the entrenched controlling owners are engaged in extracting "control premium" but sizable shareholdings accumulated by other blockholders may put brakes on their expropriating behavior and thus be conductive for efficiency enhancing. The most interesting topic for further more detailed analysis is formation, stability and roles of coalitions of large blockholders in the corporate sector of post-socialist countries.

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.

Termination Fees in Mergers and Acquisitions: Protecting Investors or Managers?

Unknown less than 15 years ago, termination fees (otherwise called kill fees) are now a commonplace component of merger and takeover agreements. Such fees typically require target firms to pay a monetary consideration to bidders if a merger or takeover agreement is broken. However, institutional investors and shareholder groups have expressed strong reservations about the magnitude of such termination fees in recent large transactions. We argue that the magnitude of termination fees reflects either potential agency problems or economic efficiency considerations. Focusing on a sample of mergers and acquisitions involving Canadian targets that allows us a richer ownership structure environment and an ability to obtain exact information on merger costs and termination fees, we evaluate the determinants of the magnitude of termination fees. First, we show that the Thomson Financial Securities Data's SDC PlatinumTM Worldwide Mergers & Acquisitions Database underestimates the true extent of termination fees. Second, results are consistent with termination fees being an efficient mechanism. Termination fees are found to be higher in transactions where the bidder incurs extensive merger costs, the deal includes a cash component and operating synergies are expected. We also find that deal premium and termination fees act as complements. Third, we do not find strong support for termination fees being a sign of agency problems. Relative termination fees are not related to changes in the CEO's golden parachute the year before the deal or to CEO retention in the acquiring firm. We do find that relative termination fees are greater with lower levels of CEO shareholdings but decrease as CEO ownership increases. Further, mechanisms related to greater monitoring do appear to reduce the level of relative termination fees. Relative termination fees are lower when the target has greater outside directors or higher leverage. Fees are also lower when we have very large family or financial block holdings. However, termination fees may simply act as complements to binding agreements from large shareholders to vote in favour of the deal or tender their shares.

Do Managers Listen to the Market?

There are competing theories as to whether managers learn from stock prices. Dye and Sridhar (2002), for example, argue that capital markets can be better informed than the firm itself, while Roll (1986) argues managers may ignore market signals due to hubris. In this paper, we examine whether managers listen to the market in making major corporate investments, and whether agency costs and corporate governance mechanisms help explain managers' propensity to listen. We find that, on average, managers listen to the market: they are more likely to cancel investments when the market reacts unfavorably to the related announcement. Further, we find mixed evidence consistent with the notion that managers' propensity to listen is related to agency costs. We find that firms tend to listen to the market more when more of their shares are held by large blockholders, and when their CEOs have higher pay-performance sensitivities.

Multiple large shareholders and firm value

This paper investigates the effects of having multiple large shareholders on the valuation of firms. Using data on Finnish listed firms, we show, consistent with our model, that a more equal distribution of votes among large blockholders has a positive effect on firm value. This result is particularly strong in family-controlled firms suggesting that families (which typically have managerial or board representation) are more prone to private benefit extraction if they are not monitored by another strong blockholder. We also show that the relation between multiple blockholders and firm value is significantly affected by the identity of these blockholders.

Banks as firms’ blockholders: a study in Spain

This article analyses how a firm's returns are affected when a bank becomes a large blockholder. We investigate this issue by taking into consideration the types of blockholders that build coalitions with banks in order to control a firm. We find that the effect on a firm's returns is negative when a bank buys the largest stake and forms coalitions with other banks. However, this negative effect does not apply in other situations. We underscore our theoretical conjectures based on an empirical analysis of a panel dataset comprising a representative sample of listed and unlisted Spanish firms over the period 1996 to 2000.

Banks as a Firm's Blockholders: A Study for Spain

This article analyses how a firm’s returns are affected when a bank becomes a large blockholder. We investigate this issue by taking into consideration the types of blockholders that build coalitions with banks in order to control a firm. We find that the effect on a firm’s returns is negative when a bank buys the largest stake and forms coalitions with other banks. However, this negative effect does not apply in other situations. We underscore our theoretical conjectures based on an empirical analysis of a panel dataset comprising a representative sample of listed and unlisted Spanish firms over the period 1996 to 2000.

Ownership and control of Polish corporations

With the company-level data on listed and unlisted companies we analyse ownership and control of Polish corporations. We find that voting control in listed corporations is remarkably concentrated with the median size of the largest block amounting to 39,5%. A sustainable concentration trend has been observed over the whole last decade. Other companies and individuals/families (mostly founders) dominate among the largest block-holders of Polish corporations. Banks’ involvement in control is below common expectations. It is also observed that – especially in smaller firms – managerial ownership is quite large. Frequently, managers are also the company founders and first or second largest block-holder. The extent of ownership and control separation is very modest with dual-class shares being the most popular device to leverage control over ownership; control through subsidiaries is applied to a lesser extent. The presence of large blockholders in listed corporations puts the minority rights and conflict of interests among stakeholders on the top of the policy agenda. Our analysis shows that the Polish capital market may be in desperate need of improvement in this respect.

IPO underpricing and outside blockholdings

Recent papers have proposed a link between underpricing of an initial public offering (IPO) and the resulting ownership structure of the firm. Brennan and Franks [J. Financ. Econ. 45 (1997) 391] hypothesize that IPO managers want to discourage new blockholdings to reduce the likelihood of being monitored. They show that underpricing encourages oversubscription, allowing discrimination against large blockholders. Conversely, Stoughton and Zechner [J. Financ. Econ. 49 (1998) 45] hypothesize that managers underprice to encourage investment by blockholders who provide monitoring services. We find that the link between underpricing and ownership structure is weak. Most firms have outside blocks in place at the IPO and retain them afterwards. In terms of acquiring new blockholders, there is no difference between firms that underprice and those that do not.