Large Shareholders Research Articles

The downside of blockholder exit threats: Increasing excess cash holdings

AbstractThis study examines the impact of blockholder exit threats on excess cash holdings following China's split‐share structural reform. Previous studies have confirmed the governance role of blockholder exit threats, but their effectiveness is limited to companies with greater private benefits. Using a sample of 2340 firm‐year observations of Chinese listed firms between 2002 and 2009, we find that the exit threat of blockholders increases the level of excess cash holdings. These results suggest that blockholders view exit threats as a means of collaborating with controlling shareholders to boost excess cash holdings and diversify corporate resources for private benefits. The collusion effect is more pronounced in firms with poorer investor protections, lower shareholding concentrations, and more severe agency conflicts. Additionally, in terms of economic consequences, blockholder exit threats decrease buy‐and‐hold abnormal returns and increase the occurrence of corporate scandals. Overall, this study provides empirical evidence of collusion among large shareholders, which harms small shareholders' interests from the perspective of excess cash holdings.

Unconsolidated separate financial statements and dividends: Evidence from Korea

The purpose of this study is to investigate whether Korean parent firms manage dividend payments by taking advantage of the Commercial Act of Korea and accounting discretion allowed under the Korean IFRS. While IFRS adoption has transformed primary financial statements from unconsolidated to consolidated financial statements, the Commercial Act of Korea continues to compute distributable profits based on unconsolidated separate financial statements. The discrepancy between the earnings for financial reporting and the distributable profits provides an opportunity for a parent firm to manage dividends upward through internal transactions without affecting consolidated earnings. Using the parent firms listed on the Korea Exchange (KRX) during the period from 2001 to 2018, we examine whether these parent firms engage in dividend management through internal transactions to meet the dividend expectations of their shareholders in the post-IFRS period. We find that the parent firms with small consolidated but large unconsolidated earnings (‘SCLU’ firms) pay more dividends than others in the post-IFRS period when they have significant transactions with related parties. The dividend-increasing behavior of the SCLU firms through related-party transactions is more pronounced when the ownership of foreign shareholders or the largest shareholder is high. Our results suggest that Korean firms may pay excessive dividends by managing distributable profits despite poor consolidated performance in order to meet shareholders’ dividend demands.

Multiple Large Shareholders, Investment Efficiency and Corporate Tax Avoidance: Evidence from China

Multiple Large Shareholders, Investment Efficiency and Corporate Tax Avoidance: Evidence from China

Blockchain mania: A perspective on corporate executive opportunism

This study investigates whether investors' overreactions to blockchain-related announcements is driven by corporate executive opportunism in the Chinese capital market. We manually collect blockchain-related announcements made by Chinese listed firms over 2016–2022 and conduct an event study to estimate market reaction. The announcements are further categorized as value-driven and speculation-driven announcements. Although both announcement types elicit positive short-term market reactions, the long-term reactions to speculation-driven announcements fade and even reverse, while the value-driven ones remain positive. Additionally, we determine that speculation-driven announcements are followed by seasoned equity offerings, negative news releases, and reductions in the stockholdings of large shareholders and executives, suggesting corporate executive opportunism. Finally, we demonstrate the efficacy of internal and external corporate governance in reducing corporate executive opportunism. Our study sheds light on market reactions to blockchain-related announcements from the perspective of executives’ opportunism.

TIFFANY & COMPANY

Tiffany & Company was the leading U.S. luxury jewelry brand, generating more than $2.6 billion in revenue through 167 retail outlets globally and from catalogue and Internet sales. For nearly 170 years, Tiffany had managed its brand. In February 2007, a hedge fund, Trian Fund Management LP, announced that it had bought a 5.5% stake in Tiffany, and became its largest shareholder. Trian believed that Tiffany was undervalued and stated that it wanted to help the company “improve its earnings per share by addressing various operational and strategic issues.” In response, Tiffany began to consider different actions to increase shareholder value.

Disclosure and Dynamic Risk Sharing with a Large Shareholder

Disclosure and Dynamic Risk Sharing with a Large Shareholder

Large shareholders and agency costs of debt. Evidence from Spain

This paper analyses the influence of large controlling shareholders on the terms of bank loans for a sample of 984 loans to 261 non-financial Spanish public and private firms over the period 2001-2017. The results show that the presence of large controlling shareholders increases the interest rate spread of bank loans only in public firms, whereas the influence is insignificant for private firms. Similarly, a less evenly balanced distribution of ownership among large shareholders is associated with higher loan spreads for public firms. Our results reveal that large controlling shareholders expropriate wealth from other investors in public firms, in line with the existence of lower benefits for borrowers due to having large controlling shareholders when they have other internal and external mechanisms of control. El objetivo del presente trabajo consiste en analizar la influencia que los grandes accionistas tienen sobre las condiciones de los préstamos bancarios para una muestra compuesta por 984 préstamos realizados a 261 empresas cotizadas y no cotizadas españolas no financieras durante el periodo 2001-2017. Los resultados muestran que la presencia de grandes accionistas incrementa el tipo de interés pagado por los préstamos en el caso de las empresas cotizadas, mientras el efecto no es significativo para las empresas no cotizadas. De forma similar, una distribución de la propiedad menos equilibrada entre los grandes accionistas está asociada con un mayor tipo de interés pagado por las empresas cotizadas. Los resultados ponen de manifiesto que los grandes accionistas expropian riqueza de otros inversores en las empresas cotizadas, en línea con la existencia de menores beneficios para los prestatarios de la existencia de grandes accionistas cuando disponen de otros mecanismos, tanto internos como externos, de control.

Disclosure and corporate governance: Evidence from Russian companies

Purpose: this article aims to provide new evidence on the role of several potential drivers of corporate disclosure that have been insufficiently studied or remain controversial in the literature on accounting and corporate governance such as one-tier vs. two-tier corporate boards, having grey directors on the board, direct vs. indirect government ownership and the ownership stake of second-largest shareholders. Methodology: the study uses rich and unique data on transparency and disclosure by Russian firms collected by the S&P agency from 2002 till 2010 and obtained by the authors under a confidentiality agreement. The analysis is based on conventional techniques of regression analysis for panel data. Findings: there is strong evidence of complementarity between corporate governance and disclosure. In particular, disclosure is enhanced by boards with a higher proportion of truly independent directors (compared to grey directors, whose role is less clear-cut), is higher in companies with a two-tier board and those with a greater stake of the second largest shareholder. It is also found that direct government ownership is associated with reduced disclosure. In contrast, no such effect is observed for indirect ownership by the state. Originality and contribution: the analysis uses detailed data from a country with a relatively poor corporate governance environment in general and low standards of mandatory disclosure, which helps observe relationships that would be hard to detect in better institutional settings. It is also one of the first studies that scrutinizes disclosure practices of publicly traded companies in Russia. The obtained findings emphasize the risks of reduced mandatory disclosure requirements, which Russian government allowed in response to the Western sanctions, on the background of a significant exodus of qualified independent/foreign directors from the corporate boards. Given the complementarity between disclosure and corporate governance, this may amplify the risks of poor corporate governance and performance of Russian firms.

Large Shareholders and Monitoring Efficacy: Empirical Examination of Nigerian Listed Oil and Gas Firms

The need for good corporate governance is germane and derives from expectation gap which arises when behaviours and goals of corporate agents fall short of their principals’ and other stakeholders’. Governance experts, academics and policy makers have argued that the persistent colossal failure of corporate giants, have put the efficacy of the role of large shareholders in doubt especially in aligning the conflicting interests and improving firm performance. Using both the agency and stakeholder hypotheses as theoretical underpinnings and Generalised Method of Moments (GMM) as an econometric tool, this study examined the efficacy of large shareholders in monitoring the activities of executive management in a sample of oil and gas firms listed on the Nigerian Stock Exchange (NSE). The findings support the Active Monitoring Hypothesis (AMH) proposed by Friend and Lang (1998) and the interests alignment hypothesis proposed by Jensen and Meckling (1976) positing the need for relevant authorities to encourage share concentration. Against the popular view that higher leverage relates with superior performance, our results suggest minimising the use of bonds, debentures and long-term loans to maximise performance. The empirical results further demonstrated that the sample firms are scale efficient.

Leveraging keystone agents in extractive industries to advance sustainability

Natural resource extraction has a lasting and dramatic impact on the natural environment as well as far-reaching social effects. As such, public policy and governmental regulation are crucial for a transition to sustainability. However, on their own, these have shown to be insufficient to achieve such transformation. Changing commitment and conduct of the extractives too is important to transit. Firms in the extractives are large and highly international, and their owners are decisive for businesses’ conduct. Therefore, it is relevant to determine whom and how to influence to transit towards sustainability. To this extent, we study dominant firms and their owners in the top-10 international extractive industries. We establish that both natural resource markets and ownership of keystone agents are highly concentrated: the three largest companies earn 70% of the revenues in the ten industries studied, and the three largest shareholders in these companies on average have 22% of the shares of the keystone firms. This helps explain why regulation has been rather ineffective so far. We discuss several options to influence keystone agents. We conclude that advancing sustainability in extractives requires leveraging a limited number of keystone agents.

Does Absence of Insider Trades Before Seasoned Equity Offerings Provide Information to the Market?

This study analyzes the interaction effect of short and long-run performance and insider trading with 1,099 seasoned equity offerings(SEOs) announced between 2004 and 2020. The major results of this study are as follows. First, insiders are net sellers prior to SEOs and the relationship between insider’s net purchase ratio and announcement effects is significantly positive. Second, the positive relationship holds only for net sell group, not for net buy group. Third, compared to firms in net sell group and net buy group, those in no trade group are marginal firms with worse operating performance, higher probability of delisting, smaller size, and lower return before SEOs, and lower ownership by largest shareholders. Fourth, regression analysis shows that announcement effect and long-run performance of no trade group is significantly more negative than net sell group and net buy group. To summarize, “dog that did not bark” effect exists in insider trading before SEOs and the absence of insider trades provide valuable information to the market.

The role of large shareholders in goodwill impairment decisions – Evidence from China

Our paper examines how large shareholders manage goodwill impairment to inflate earnings as well as the role of audit functions in this setting. The influence of large shareholders on corporate decisions is well documented, however, overlooked in goodwill literature. Using data from China, we find that a higher ownership percentage held by large shareholders associates with a lower likelihood of recording goodwill impairment as well as a reduced impairment amount, suggesting that goodwill impairment is intentionally avoided or decreased by large shareholders. We further find that the presence of big4 auditors mitigates such relationship.

Minority state ownership and firm performance: Evidence from the Chinese stock market crash in 2015

AbstractWe examine the effect of minority state ownership on firm performance using the Chinese stock market crash in 2015. We find that treatment firms with minority state ownership accumulated from governmental purchases of equities experience significant reductions in operating performance. The negative impact is more severe in firms with higher riskiness and firms with less powerful large shareholders. We also find that treatment firms’ risk decreases and their employment increases after minority state shareholders step in, providing supportive evidence on the government's motives of reducing risk and preventing mass layoffs. Further tests reveal the channels through which minority state ownership impedes investment efficiency, productivity, and innovation. The negative impact diminishes when government institutions divest their shares in a timely manner. Overall, our results suggest there are unintended negative consequences of minority state ownership arising from the governmental rescue package in a market crisis.

Relationship between Earnings Management and large shareholder in Chinese listed companies

The essay aims to find the relationship between earnings management (including accrual-based earnings management and real earnings management) and the large shareholder. The database of the survey is based on the data of listed companies in China between 2014 and 2018. The relationship will be found by testing the moderate effect between the large shareholder and the degree of real earnings management and accrual-based earnings management in the enterprises in the database. The study can help us have a better understanding of the manipulation of accrual-based and real earnings management among listed companies with the shareholder concentration degree and its economic consequences. It can also help users of accounting information and external benefits stakeholders have a better understanding of the financial information of listed companies.

Intervention of large shareholders and corporate fraud – evidence from vertical interlock in corporate pyramids in an emerging economy

AbstractThrough using 17,995 firm‐year observations of all the Chinese A‐share listed firms from 2008 to 2016 as a sample, we document that firms with vertical interlock have a lower likelihood of committing corporate fraud. We further test the underlying mechanisms, and we find that the effect of vertical interlock on the occurrence of corporate fraud is more pronounced when firms operate in a region with poor legal protection; with the legal environment being enhanced in China, the effect of vertical interlock has become less significant; and the effect of vertical interlock is also more pronounced when firms exhibit poor information environment at the firm level. Our results in this paper imply that the role of large shareholders and legal protection are substitutes in an emerging economy, and even with rapid economic and legal development in China, large shareholders keep playing a positive role in controlling fraudulent behaviours in Chinese listed firms.

ESG rating and financial risk of mining industry companies

The mining industry is one of the pillar industries of the manufacturing industry, characterized by high pollution, high energy consumption, and financial fragility. ESG ratings have a significant influence on the financial risks of mining industry companies. This paper employs quarterly data from Chinese listed mining companies from 2009 to 2021 to empirically analyze the impact of ESG ratings on the financial risks of mining companies. It explores the mechanisms through which ESG ratings influence the financial risks of mining companies in terms of resource support, risk control, and governance effects. The findings suggest that improving ESG performance helps mitigate financial risks for mining companies. In terms of the underlying mechanisms, ESG performance alleviates financing constraints, enhances risk control, mitigates agency problems with large shareholders, and thus reduces financial risks. The conclusion of this paper proves that ESG rating is an important lever in promoting green economic development. Developing countries should strengthen the disclosure of ESG information of heavily polluting companies, play the financial guidance role of ESG information, and promote such companies to embark on the path of green development.

Multiple large shareholders and cost stickiness: evidence from China

Using a sample of Chinese listed firms from 2001 to 2017, this study investigates the impact of multiple large shareholders (MLS) on cost stickiness from the agency costs perspective. We find a positive association between MLS and cost stickiness after controlling for various determinants of cost stickiness. The results of additional analyses suggest that coordination costs among large shareholders make it challenging to monitor managers, and stronger protection of minority shareholders helps to eliminate the effect of MLS on cost stickiness. This paper extends our understanding of the ‘dark side’ of MLS and complements existing research investigating the determinants of cost stickiness from the ownership structure perspective.

Ownership structure and agency costs: evidence from the insurance industry in Jordan

PurposeThis study investigated the impact of corporate ownership structure on agency costs in the insurance industry.Design/methodology/approachThe study sample included 23 insurance companies listed on the Amman Stock Exchange (ASE) from 2010 to 2019. Panel regression was used to account for the firm- and time-specific unobservable variables and system-GMM estimation was used to address endogeneity concerns.FindingsThe results show that managerial ownership positively (negatively) affects selling, general and administrative (SG&A) expenses (assets turnover), implying that unmonitored managers engage in activities that serve their own interests rather than those of shareholders. The largest shareholder's ownership has no impact on agency costs, implying that the ownership of the largest shareholder is irrelevant. However, as the wedge between the percentage of capital owned by the largest shareholders and managers increases, SG&A expenses (efficiency ratio) decrease (increases), indicating that the existence of large non-management shareholders reduces agency costs. After accounting for the endogeneity problem, the impact of ownership structure on agency costs measured by asset turnover remains robust.Originality/valueTo the best of the authors' knowledge, this study is the first to provide unique evidence and useful insights into the determinants of agency costs from a frontier market in the Middle East and North Africa (MENA), with a focus on the insurance sector. Additionally, this study uses a new measure of separation between ownership and control by calculating the wedge between managers' and large shareholders' ownership.

Multiple large shareholders, agency problem, and firm innovation

AbstractThis paper, in the context of agency problem, examines the impacts of multiple large shareholders on firm innovation. A dataset of non‐financial listed firms in China was established from 2007 to 2019. Innovation is divided into innovative quantity and innovative quality. The results demonstrate that multiple large shareholders can trigger innovative quantity and improve innovative quality. Multiple large shareholders restrict excessive earnings management and optimize pay gap by top manager to support innovation. It also finds that multiple large shareholders have a positive impact on firm's innovation through reducing share pledge and tunneling action of controlling shareholders. Moreover, it is also confirmed that better information environment and legal framework contribute to the positive effect of multiple large shareholders in corporate governance, along with firm innovation superior.

Does the Shareholding Proportion of Large Shareholders Affect the Horizontal Organizational Structure? Evidence from Listed Companies in China

ABSTRACT This paper examines how the shareholding proportion of large shareholders affects the horizontal organizational structure of business groups. We empirically find that as the shareholding proportion of large shareholders increases, the number of subsidiaries decreases, which provides evidence of the alignment effect and risk aversion of large shareholders. Our results are robust to various robustness tests. The mechanism tests further verify the alignment effect and risk aversion of large shareholders, showing that as ownership becomes more concentrated, large shareholders tend to reduce agency problems and avoid risks. This study enhances the understanding of horizontal expansion in pyramidal organizational structures.