Dear Patrick,

The negative view on powerful insiders (see for instance the managerial power hypothesis by Bebchuk and Fried 2004) and the positive view on large outside block holders is typical of Anglo Saxon (US – UK) institutional settings.

In continental Europe, there is much discussion about the “type 2” agency conflicts between large and small shareholders. Large shareholders can extract rents from small shareholders. La Porta et al. (1999) argue that the conflict between blockholders (large controlling shareholders) and minority shareholders is the primary corporate governance problem associated with concentrated ownership. Think for instance the position of banks that are at the same time lenders and shareholders of a firm. This type of shareholders can force to invest in low risk projects so as to protect their interests as lenders. The specific interest of a large shareholder might be contrary to the general interests of the small shareholders.

The influence of large block holders on the governance of the firm is far from being clear. There is evidence of the monitoring role by large shareholders and also of wealth expropriation. For a discussion on how large shareholders benefit from their control see for instance Johnson, S., La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 2000. Tunneling. American Economic Review Papers and Proceedings, May, 2000). I remember also a survey by Holderness that you might find relevant (although it is quite old)

It is available through

https://www2.bc.edu/~holderne/SurveyBlockholders.pdf

My view on this topic is that the most important think to take into account is the institutional setting which definitively has a clear influence on the role played by inside and outside block holders.

Kind regards

Carlos Fernández

Hi

Dear Carlos, I thank you for your interest and your reply. I agree that the institutional context matters, but blockholder's identity seems  to be important for me to explain influence and decision's power. Insiders have private information. Moreover the second blockholder may monitor the first one, and avoid resources extraction at the exclusive benefit of the the controlling coalition. From an other point of view, the global ownwership structure of equity seems also interesting to consider to evaluate the relative power of each participant. Here are two papers that could of interest:

Koniijn S, K, Kraussl R, A Lucas, "Blockholder dispersion and firm value", Journal of Corporate Finance, 2011, 17 (5), p 1330-1339.  

N Basu, I Paeglis, M Rahnamaei, "Multiple Blockholders, power and firm value", Journal of Banking and finance, 2016,66, p 66 -78.

Best regards

Dear Patrick,

You are totally right. Independently of the institutional setting there is always going to be information asymmetry between insiders and outsiders and also the distribution of ownership among outside block holders has an influence on their incentives and capability to monitor each other.

Another feature that it is worth to consider is the time horizon for the institutional shareholders investment. That is, long term investors gain inside knowledge through time and also gain access to influence the executive team through “informal channels”. Short term and long term investors might have different attitudes towards monitoring, since the former have incentives mostly to promote changes in the governance of the firm that have effects in the short term (otherwise they would not benefit from these changes). The use of categories such as those used by Bushee (1998) might be interesting. It might be more interesting to control the investors’ churn ratio to measure the effect of the institutional shareholders’ time horizon on their monitoring behaviour (Gaspar, Massa y Matos, 2005).

Kind regards

Carlos Fernández

Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. Accounting review, 305-333.

Gaspar, J. M., Massa, M., & Matos, P. (2005). Shareholder investment horizons and the market for corporate control. Journal of financial economics,76(1), 135-165.

HI,

Many thanks for this short term and long term vision of the blockholders investment. In case of corporate control issues, or with respect to family firms, it is true that blockholders may have different behaviors. I am also wondering if the diversification (or the lack of diversification) of the blockholders will influence their behavior as shareholders. Concerning family firms, beyond Anderson and Reeb (2003), do you know some other papers like this one:

Villalonga B, and Amit R, "How do familyownership, control and management affect firm valmue?", 2006 Journal of financial Economics, 80, p 385-417.

Best regards.

I think that family firms

Dear Patrick,

Although I have collaborated in family firm projects, I am not an expert at all and my knowledge of the relevant literature in this area is fairly limited.

Given the relevance of family firms in Europe (I guess they are similarly important in France and in Spain) there is still much work to be done. Specially, in all that relates to further research of the heterogeneity of family firms. Many works to date treat family firms as a homogeneous group and this is not the reality (for instance, first generation vs second generation and beyond).

Good luck with your research project.

Kind regards

Carlos Fernández

Dear Carlos,

Thanks one more time. I will try to have a little focus on family firms, and I have in perspective one paper on the "governance of family firms" written by B Villalonga and al (2014).

The best for you. 

Hi Patrick,

Interesting question. The multiple blockholders can have an opposite effect also on agency problems. You have quoted two interesting articles (Koniijn et al., 2011; Basu et al., 2016). I also suggest the Bock and Hege (2003) model as methodology. About this topic the results are controversial. However, a high contestability seems beneficial for firm value and appears to have a monitoring role on the agency costs (e.g., Maury and Pajste, 2005; Boubaker, 2005; Boubaker et al., 2012; Laeven and Levine, 2008; Bellot, 2008; Attig et al., 2008; Santos et al., 2015).

Greetings,

Fabrizio

Hi Fabrizio,

Thanks you for the papers quoted and your interest for the topic. I am trying now  to analyse the paper of A  Edmans and G Manso, " Governance through trading and intervention: A theory of multiple blockholders", Review of Financial Studies, 2011, 24, p 2395 -2428

Best regards.

Patrick

The question is a really important issue and there is many components in terms of a finance response.  A traditional response is to suggest blockholders through monitoring reduce Principle Agent (PA) costs.  Blockholders have the capacity to expropriate profits from minority shareholders referred to as Principle-Principle (PP) cost through control of dividend policy, cashflows, contracting with associated companies and other forms of tunnelling.  We empirically found this for ASEAN countries and in mature markets.  The market for control and governance through trading obviously addresses this power.  Ownership concentration impacts both PA and PP.  Earnings Management is another factor in the mix where PP and PA are found to be present. Our work also show where Government is a large blockholder in a listed mixed ownership company the results are quite confounding vis a vis pure private shareholding companies.  Finally our work on unlisted micro-small-medium enterprises indicates similar issues to the listed private sector companies with concentrated control.

Edmans and Manso (2011) is a good paper.

Hi Stuart, 

Your findings are interesting. I believe that similar problem affects both PA and PP scenario. Also, it is a problem that affects unlisted and listed companies. Obviously, multiple blockholders must hold a significant percentage of shares, such that control contests could be a possible (and real) scenario.

HI,

I advise those of you interested in the subject to read this paper forthcoming in the "Journal of Financial Economics" 2016. It is at the boarder of the topic:

I R Appel, T A Gormley D B Keim, "Passive investors, not passive owners".

Many mutual funds do not actively buy or sell shares to influence managerial decisions. They may have only for objective to deliver the returns of a market index. But this doesn't mean that they behave as lazy investors. Appel Gormley and Keim find that wxhen their ownership in a firm is high, independence of the board increases, and takeover defenses vanished. Moreover dual class share structure seems to be reduced. Thus improvement in performance and value may happen.

Dear Patrick,

In my view firm value in case of several blockholders finally depends on the market  perception of the bockholders. If firm value is measured by stock prices, then, indeed, firm value is established by the market. Thus, if the market perceives blockholders to oversee the executives properly and not to engage in tunnelling, market prices and firm vlaue may increase. This could be the case with mutual funds blockholders. In case of publicly traded family firms large outside blockholders could lead to the same perception by the market.

To the contrary, there seems to be evidence, at least for Germany, that large public companies governed by blockholders who are family members trade at a discount on the stock exchange. So blockholders may be not perceived in the same way in each and every case by the market.

Paul